Mercantile Law Reviewer

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NOTES ON MERCANTILE LAW REVIEW 2019

GUILLER B. ASIDO, Ll.M.
LAWS COVERED
1. Letters of Credit (Code of Commerce Arts 567-572)

2. Trust Receipts Law (PD 115)
3. Warehouse Receipts Law (Act 2137)
4. Transportation Law:
a. Civil Code (Arts.1732-1756)
b. Warsaw Convention
5. Corporation Code (BP 68)
6. Insurance Code (PD 612 as amended by Republic Act 10607)
7. Securities Regulation Code (RA 8799)
8. Banking Laws:
a. General Banking Law (RA 8791)
b. Central Bank Law (RA 7653 as amended by RA 11211)
c. Secrecy of Bank Deposits (RA 1405)
d. Foreign Currency Deposit Law (RA 6426)
e. Anti-Money Laundering Law (RA 9160 as amended by RA 10365)
f. Philippine Deposit Insurance Corporation Act (RA 3591)
9. Intellectual Property Law (RA 8293 as amended by RA 10372)
10.Foreign Investments Act (RA 7042)
11.Financial Rehabilitation and Insolvency Law (RA 10142)
12.Negotiable Instruments Law (Act no. 2031)
13.E-Commerce Act (RA 8792)
14.Data Privacy Act (RA 10173)
DEFINITION OF COMMERCIAL LAW
Branch of private law that regulates the juridical relations arising from commercial acts.
The sources of commercial law are:

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1. Principal – Statute Law, Agreements, Customs and Court decisions.
2. Auxilliary – Natural Law, Foreign Statutory Law and Foreign Court Decisions, and Opinions.
TIPS IN RESOLVING COMMERCIAL LAW QUESTION:
The definition of Commercial Law provides the framework for any question relating to Commercial Law. Therefore, it is
important to KNOW AND UNDERSTAND:
1. Is there is a commercial transaction

2. What is the commercial transaction?
3. Who are the parties?
4. In what capacity are the parties involved in this commercial transaction?
5. What are the parties’ responsibilities and liabilities, if any?
6. Do the parties have a valid defense/remedies
1987 CONSTITUTIONAL PROVISIONS RELEVANT TO PHILIPPINE COMMERCIAL LAW
The following are the constitutional provisions relevant to Commercial Law:

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DECLARATION OF STATE PRINCIPLES (Art. II)
Section 19. The State shall develop a self-reliant and independent national economy effectively controlled by Filipinos.
Section 20. The State recognizes the indispensable role of the private sector, encourages private enterprise, and provides incentives to
needed investments.
ARTICLE XII (National Economy and Patrimony)
Section 1. The goals of the national economy are a more equitable distribution of opportunities, income, and wealth; a sustained
increase in the amount of goods and services produced by the nation for the benefit of the people; and an expanding productivity as the
key to raising the quality of life for all, especially the underprivileged.
The State shall promote industrialization and full employment based on sound agricultural development and agrarian reform, through
industries that make full of efficient use of human and natural resources, and which are competitive in both domestic and foreign
markets. However, the State shall protect Filipino enterprises against unfair foreign competition and trade practices.
In the pursuit of these goals, all sectors of the economy and all region s of the country shall be given optimum opportunity to develop.
Private enterprises, including corporations, cooperatives, and similar collective organizations, shall be encouraged to broaden the base
of their ownership.
xxx
Section 6. The use of property bears a social function, and all economic agents shall contribute to the common good. Individuals and
private groups, including corporations, cooperatives, and similar collective organizations, shall have the right to own, establish, and
operate economic enterprises, subject to the duty of the State to promote distributive justice and to intervene when the common good so
demands.
xxx
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Section 10. The Congress shall, upon recommendation of the economic and planning agency, when the national interest dictates,
reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such
citizens, or such higher percentage as Congress may prescribe, certain areas of investments. The Congress shall enact measures that
will encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos.
In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give preference to
qualified Filipinos.
The State shall regulate and exercise authority over foreign investments within its national jurisdiction and in accordance with its
national goals and priorities.
Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to
citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of
whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer
period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in
public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall
be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association
must be citizens of the Philippines.
Section 12. The State shall promote the preferential use of Filipino labor, domestic materials and locally produced goods, and adopt
measures that help make them competitive.
Section 13. The State shall pursue a trade policy that serves the general welfare and utilizes all forms and arrangements of exchange on
the basis of equality and reciprocity.
Section 14. The sustained development of a reservoir of national talents consisting of Filipino scientists, entrepreneurs, professionals,
managers, high-level technical manpower and skilled workers and craftsmen in all fields shall be promoted by the State. The State shall
encourage appropriate technology and regulate its transfer for the national benefit. The practice of all professions in the Philippines
shall be limited to Filipino citizens, save in cases prescribed by law.
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Section 15. The Congress shall create an agency to promote the viability and growth of cooperatives as instruments for social justice
and economic development.
Section 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private
corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the
common good and subject to the test of economic viability.
Section 17. In times of national emergency, when the public interest so requires, the State may, during the emergency and under
reasonable terms prescribed by it, temporarily take over or direct the operation of any privately-owned public utility or business
affected with public interest.
Section 18. The State may, in the interest of national welfare or defense, establish and operate vital industries and, upon payment of just
compensation, transfer to public ownership utilities and other private enterprises to be operated by the Government.
Section 19. The State shall regulate or prohibit monopolies when the public interest so requires. No combinations in restraint of trade
or unfair competition shall be allowed.
Section 20. The Congress shall establish an independent central monetary authority, the members of whose governing board must be
natural-born Filipino citizens, of known probity, integrity, and patriotism, the majority of whom shall come from the private sector.
They shall also be subject to such other qualifications and disabilities as may be prescribed by law. The authority shall provide policy
direction in the areas of money, banking, and credit. It shall have supervision over the operations of banks and exercise such regulatory
powers as may be provided by law over the operations of finance companies and other institutions performing similar functions.
Until the Congress otherwise provides, the Central Bank of the Philippines operating under existing laws, shall function as the central
monetary authority.
Section 21. Foreign loans may only be incurred in accordance with law and the regulation of the monetary authority. Information on
foreign loans obtained or guaranteed by the Government shall be made available to the public.
LETTERS OF CREDIT (Code of Commerce)

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A letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay money or deliver goods to a third
person and assumes responsibility for payment of debt therefor to the addressee.
 A letter of credit is one whereby one person requests some other person to advance money or credit to a third person, and promises that
he will repay the same to the person making the advancement, or accept the bills drawn upon himself for the like amount. Under
Art.567-568 of the Code of the Commerce, letters of credit are issued by one merchant to another for the purpose of attending to a
commercial transaction. (BPI vs. Commissioner of Internal Revenue [2006)
Two Essential Conditions for a Letter of Credit
1. A letter of credit is issued in favor of a definite person and not to order. It is not a negotiable instrument governed by the
Negotiable Instruments Law.
2. It is limited to specified amount, which may be one or more but always with a maximum amount.
If any of the two circumstances is missing, it is not a letter of credit. It is a mere recommendation.
Parties to a Letter of Credit

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1. Issuer – This is the entity that will issue the credit. It usually is a bank but it can be any financial institution of substance. The issuer
assumes the full obligation topay the beneficiary upon the presentation of the documents specified in the credit.
2. Applicant – The applicant is also known as the account party or customer. He requests from the issuer the credit he wants for his
beneficiary. He pays the issuer for the credit with cash or collateral so as to secure the issuer the funds necessary for the reimbursement
obligation to the beneficiary.
3. Beneficiary – The beneficiary is the party that will be identified in the credit as the entity entitled to draw or demand payment under
the letter of credit.
4. Advising Bank – The role of the advising bank is to notify the beneficiary that a credit has been issued by another bank. It assumes
no responsibility other than notifying the beneficiary. However, its obligation is limited to accurately advising the terms of the credit
that has been issued. In this capacity it is only playing “post office”.
5. Confirming Bank – The responsibility of the confirming bank is that it becomes directly obligated on the credit and now assumes the
rights and obligations of the issuer. Typically, the confirming bank’s role is one for geographic convenience, i.e., a bank located close to
the beneficiary. However, it can also be a well-known bank, that will assume the responsibility for a lesser known bank by confirming
their credit, therefore, rendering the credit more acceptable to the beneficiary.
Kinds of Letters of Credit
1. Commercial L/C
- Used as a method of payment in a contract sale of goods, so that the seller (beneficiary) can obtain payment directly from the issuer
instead of the beneficiary.
2. Stand by L/C
- This involves non-sale transactions. The L/C is used as guarantee, or secure either a monetary or non-monetary obligation, whereby the
issuer pays the creditor, if the debt defaults on the obligation.
Important Doctrines in Letters of Credit

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1. Independence Rule – This principle of independence clearly states that the obligation of the paying bank is in reading the text of the
credit which is wholly independent from sales or other contracts on which the credit may be based. The issuing bank is not required to
evaluate if the beneficiary has performed under the underlying contract or if it is contractually entitled to payment. The issuer is only
obligated to pay upon presentation of documents that conform to the requirements of the letter of credit.
Transfield Philippines vs Luzon Hydro Electric Corp. (GR No 146717, Nov 22, 2004, Tinga)
Transfield entered into a turn-key contract with Luzon Hydro Corp. (LHC). Under the contract, Transfield were to construct a hydro-
electric plants in Benguet and Ilocos. The contract provides for a period for which the project is to be completed and also allows for the
extension of the period provided that the extension is based on justifiable grounds such as fortuitous event. In order to guarantee
performance by Transfield, two stand-by letters of credit were required to be opened. During the construction of the plant, Transfield
requested for extension of time citing fortuitous events brought about by typhoon, barricades and demonstration. LHC did not give due
course to the extension of the period prayed for but referred the matter to arbitration committee.
In the meanwhile, because of the delay in the construction of the plant, LHC called on the stand-by letters of credit because of default.
However, the demand was objected by Transfield on the ground that there is still pending arbitration on their request for extension of
time. LHC invoked the “independence principle”. On the other hand, Transfield claims fraud on the part of LHC on calling the stand-by
letters of credit.
Under the independence principle, a LC accommodation is entirely distinct and separate, independent agreement. It is not supposed to
be affected by the main contract upon which it rests.
2. Strict Compliance Rule – The beneficiary must make presentment in strict compliance with the terms, conditions and procedures of the
credit. Further to this, since the adherence of the requirements must be strictly applied to the beneficiary, the beneficiary must know
precisely and unequivocally what those requirements are.
3. Fraud Exception Principle -exists when the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the
confirming bank, documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue.
ON LETTER OF CREDIT “INDEPENDENCE PRINCIPLE”

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Where the trial court rendered a decision finding the buyer solely liable to pay the seller and omitted by inadvertence to insert in its
decision the phrase “without prejudice to the decision that will be made against the issuing bank “, the bank cannot evade responsibility
based on this ground. The seller who is entitled to draw on the credit line of the buyer from a bank against the presentation of sales
invoices and official receipts of the purchases and who obtained a court judgment solely against the buyer even though the suit is against
the bank and the buyer may still enforce the liability of the same bank under a letter of credit issued to secure the credit line. The so-
called "independence principle" in a letter of credit assures the seller or the beneficiary of prompt payment independent of any breach of
the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not.
(Philippine National Bank vs. San Miguel Corporation. G.R. No. 186063, January 15, 2014)
Effect of Fraudulent Misrepresentation in applying and securing an L/C:
G.R. No. 187979. April 25, 2012.]

ASIA UNITED BANK, petitioner, vs. GILBERT G. GUY, PHILIP LEUNG, KATHERINE L. GUY, RAFAEL H. GALVEZ and
EUGENIO H. GALVEZ, JR., respondents.
We emphasize that fraud in its general sense, is deemed to comprise anything calculated to deceive, including all acts, omissions, and
concealment involving a breach of legal duty or equitable duty, trust, or confidence justly reposed, resulting in damage to another, or by
which an undue and unconscientious advantage is taken of another. It is a generic term embracing all multifarious means which human
ingenuity can device and which are resorted to by one individual to secure an advantage over another by false suggestions or by
suppression of truth and includes all surprise, trick, cunning, dissembling and any unfair way by which another is cheated.
It is true that ordinarily, in a letter of credit transaction, the bank merely substitutes its own promise to pay for the promise to pay of one
of its customers, who in turn promises to pay the bank the amount of funds mentioned in the letters of credit plus credit or commitments
fees mutually agreed upon. Once the issuing bank shall have paid the beneficiary after the latter's compliance with the terms of the letter
of credit, the issuing bank is entitled to reimbursement for the amount it paid under the letter of credit.
In the present case, however, no reimbursement was made outright, precisely because the letter of credit was secured by a promissory
note executed by SPI. The bank would have not agreed to this transaction had it not been deceived by Gilbert Guy, et al. into believing
the RMSI and SPI were one and the same entity. Guy and his cohorts' acts in (1) securing the letter of credit guaranteed by a promissory
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note in behalf of SPI; and, (2) their act of representing SPI as RMSI's Division, were indicia of fraudulent acts because they fully well
know, even before transacting with the bank, that: (a) SPI was a separate entity from Smartnet Philippines, the RMSI's Division, which
has the Omnibus Credit Line; and (b) despite this knowledge, they misrepresented to the bank that SPI is RMSI's division. Had it not for
this false representation, AUB would have not granted SPI's letter of credit to be secured with a promissory note because SPI as a
corporation has no credit line with AUB and SPI by its own, has no credit standing.
[G.R. No. 160732. June 21, 2004.]

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner, vs. HON. REYNALDO B. DAWAY, in his
capacity as Presiding Judge of the Regional Trial Court of Quezon City, Branch 90 and MAYNILAD WATER SERVICES,
INC., respondents.
The concept of guarantee vis-a-vis the concept of an irrevocable letter of credit are inconsistent with each other. The guarantee theory
destroys the independence of the bank's responsibility from the contract upon which it was opened and the nature of both contracts is
mutually in conflict with each other. In contracts of guarantee, the guarantor's obligation is merely collateral and it arises only upon the
default of the person primarily liable. On the other hand, in an irrevocable letter of credit, the bank undertakes a primary obligation. We
have also defined a letter of credit as an engagement by a bank or other person made at the request of a customer that the issuer shall
honor drafts or other demands of payment upon compliance with the conditions specified in the credit.
Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the presentation of documents
and is thus a commitment by the issuer that the party in whose favor it is issued and who can collect upon it will have his credit against
the applicant of the letter, duly paid in the amount specified in the letter. They are in effect absolute undertakings to pay the money
advanced or the amount for which credit is given on the faith of the instrument. They are primary obligations and not accessory
contracts and while they are security arrangements, they are not converted thereby into contracts of guaranty. What distinguishes letters
of credit from other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and other required
shipping documents are presented to it. They are definite undertakings to pay at sight once the documents stipulated therein are
presented.
Remedy for fraudulent abuse
The remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless (1) There is clear proof of fraud; (b.)
The fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud under the main agreement;
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(c.) irreparable injury might follow if injunction is not granted or the recover of damages would be seriously damaged. (See Transfield
case)
Remedy of issuing bank after payment of the beneficiary
Once the issuing bank shall have paid the beneficiary after the latter’s compliance with the terms of the letter of credit, the issuing bank
is entitled to reimbursement for the amount it paid under the letter of credit. (Galvez vs. Court of Appeals [2012])
TRUST RECEIPTS LAW (PD 115)
 "Trust Receipt" shall refer to the written or printed document signed by the entrustee in favor of the entruster containing terms and
conditions substantially complying with the provisions of Presidential Decree no.115. No further formality of execution or
authentication shall be necessary to the validity of a trust receipt.
Parties to a Trust Receipt
 "Entrustee" shall refer to the person having or taking possession of goods, documents or instruments under a trust receipt
transaction, and any successor in interest of such person for the purpose or purposes specified in the trust receipt agreement.
 "Entruster" shall refer to the person holding title over the goods, documents, or instruments subject of a trust receipt transaction,
and any successor in interest of such person.
A trust receipt may be denominated in the Philippine currency or any foreign currency acceptable and eligible as part of international
reserves of the Philippines, the provisions of existing law, executive orders, rules and regulations to the contrary notwithstanding:
Provided, however, That in the case of trust receipts denominated in foreign currency, payment shall be made in its equivalent in
Philippine currency computed at the prevailing exchange rate on the date the proceeds of sale of the goods, documents or instruments
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held in trust by the entrustee are turned over to the entruster or on such other date as may be stipulated in the trust receipt or other
agreements executed between the entruster and the entrustee.
Rights of Entruster
1. The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments released under a trust receipt
to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt;
2. or to the return of the goods, documents or instruments in case of non-sale, and to the enforcement of all other rights conferred on
him in the trust receipt provided such are not contrary to the provisions of this Decree
Obligations of Entrustee
 The entrustee shall:
1. Hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms
and conditions of the trust receipt;
2. Receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the
entruster or as appears on the trust receipt;
3. Insure the goods for their total value against loss from fire, theft, pilferage or other casualties;
4. Keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the
entruster;
5. Return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and
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6. Observe all other terms and conditions of the trust receipt not contrary to the provisions of PD 115.
Who bears liability in case of loss
 The risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments which are the subject of a trust receipt,
pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his
obligation to the entruster for the value thereof.
INC., PERCIVAL G. LLABAN and MANUEL P. LUCENTE, petitioners, vs. METROPOLITAN BANK & TRUST
COMPANY, respondent. (G.r. No. 159622. July 30, 2004.)
The Trust Receipts Law was enacted to safeguard commercial transactions and to offer an additional layer of security to the lending
bank. Trust receipts are indispensable contracts in international and domestic business transactions. The prevalent use of trust receipts,
the danger of their misuse and/or misappropriation of the goods or proceeds realized from the sale of goods, documents or instruments
held in trust for entruster banks, and the need for regulation of trust receipt transactions to safeguard the rights and enforce the
obligations of the parties involved are the main thrusts of the Trust Receipts Law.
The second paragraph of Section 7 provides a statutory remedy available to an entruster in the event of default or failure of the entrustee
to comply with any of the terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee. More
specifically, the entruster “may cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the
proceeds realized therefrom at any time”. The law further provides that “the entruster in possession of the goods, documents or
instruments may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than five days after serving or
sending of such notice, sell the goods, documents or instruments at public or private sale, and the entruster may, at a public sale, become
a purchaser. The proceeds of any such sale, whether public or private, shall be applied (a) to the payment of the expenses thereof; (b) to
the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of the
entrustee's indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency.”
JESUS V. TIOMICO, petitioner, vs. THE HON. COURT OF APPEALS (FORMER FIFTH DIVISION) and PEOPLE OF THE
PHILIPPINES, respondent (G.R. No. 122539. March 4, 1999.)
The Trust Receipts Law punishes the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another
regardless of whether the latter is the owner or not. The law does not seek to enforce payment of a loan. Thus, there can be no violation
of the right against imprisonment for non-payment of a debt."
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MELVIN COLINARES and LORDINO VELOSO, petitioners, vs. HONORABLE COURT OF APPEALS, and THE PEOPLE
OF THE PHILIPPINES, respondents. (G.R. No. 90828. September 5, 2000.)
There are two possible situations in a trust receipt transaction. The first is covered by the provision which refers to money received
under the obligation involving the duty to deliver it (entregarla) to the owner of the merchandise sold. The second is covered by the
provision which refers to merchandise received under the obligation to "return" it (devolvera) to the owner.
Hur Tin Yang vs. People of the Philippines. (G.R. No. 195117, August 14, 2013)
When both parties entered into an agreement knowing fully well that the return of the goods subject of the trust receipt is not possible
even without any fault on the part of the trustee, it is not a trust receipt transaction penalized under Sec. 13 of PD 115 in relation to Art.
315, par. 1(b) of the RPC, as the only obligation actually agreed upon by the parties would be the return of the proceeds of the sale
transaction. This transaction becomes a mere loan, where the borrower is obligated to pay the bank the amount spent for the purchase of
the goods.
Can an entrustee invoke the principle of res perit domino to evade liability under the Trust Receipts?
Where the entrustee tendered the return of the articles to the entrustee because they did not meet its manufacturing requirements but the
latter refused to accept and as a consequence, the entruster stored them in its warehouse which was, however, gutted by fire, the
entrustee’s obligation was not extinguished despite the tender and its invocation of the principle of res perit domino. Under the Trust
Receipts law, the loss of the goods under trust receipt regardless of the cause and the period or time it occurred, does not extinguish the
civil obligation of the entrustee. A trust receipt has two features, the loan and security features. The loan is brought about by the fact that
the entruster financed the importation or purchase of the goods under TR. Until and unless this loan is paid, the obligation to pay
subsists. The principle of res perit domino will not apply if under the trust receipt, the bank is made to appear as the owner, it was but an
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artificial expedient, more of legal fiction than fact, for if it were really so, it could dispose of the goods in any manner that it wants,
which it cannot do, just to give consistency with the purpose of the trust receipt of giving a stronger security for the loan obtained by the
importer. To consider the bank as the true owner from the inception of the transaction would be to disregard the loan feature thereof.
(Rosario Textiles vs. Home Bankers [2005])
f the entrustee is a corporation in violation of the Trust Receipts Law, to whom shall the penalty be imposed?
Recognizing the impossibility of imposing the penalty of imprisonment on a corporation, it was provided that if the entrustee is a
corporation, the penalty shall be imposed upon the directors, officers, employees or other officials or persons responsible for the offense.
However, the person signing the trust receipt for the corporation is not solidarily liable with the entrustee-corporation for the civil
liability arising from the criminal offense unless he personally bound himself under a separate contract of surety or guaranty.
May a civil case filed by the entruster against the entrustee proceed separately from the criminal action?
Yes. A civil case filed by the entruster against the entrustees based on the failure of the latter to comply with their obligation under the
Trust Receipt agreement is proper because this breach of obligation is separate and distinct from any criminal liability for misuse and/or
misappropriation of goods or proceeds realized from the sale of goods released under the trust receipts. Being based on an
obligation ex contractu and not ex delicto, the civil action may proceed independently of the criminal proceedings instituted against the
entrustees regardless of the result of the latter. (Sarmiento vs. Court of Appeals [2002])
May novation be invoked to reverse convictions in cases where an underlying contract initially defined the relation of the parties
such as the contract in the sale of goods in violation of the Trust Receipts Law?
Yes. Novation may be invoked to reverse convictions in cases where an underlying contract initially defined the relation of parties such
as contract in sale of goods in cases of violation of the Trust Receipts Law. Novation is not one of the modes of extinguishing criminal
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liability. The role of novation may only be to either prevent the rise of criminal liability or to cast doubt on the true nature of the original
basic transaction, whether or not it was such that its breach would not give rise to penal responsibility. The party invoking novation must
prove that the new contract did take effect.
INSURANCE LAW (PD 612 as amended by RA 10607)
Nature and Definition of Insurance Contract

A contract of insurance is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event (Section 2 [1], Insurance Code of 1978) [Philippine Health Care Providers Inc.,
vs. Commissioner, GR no.167330, June 12, 2008)
A contract of suretyship shall be deemed to be an insurance contract, only if made by a surety who or which, as such is doing an
insurance business as hereinafter provided.
 “Doing an Insurance Business” - shall include (a) making or proposing to make, as insurer, any insurance contract; (b) making or
proposing to make as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or
activity of the surety; (c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing
of an insurance business within the meaning of this Code; (d) doing or proposing to do any business in substance equivalent to any of
the foregoing in a manner designed to evade the provisions of this Code.
In the application of the provisions of this Code the fact that no profit is derived from the making of insurance contracts, agreements or
transactions or that no separate or direct consideration is received therefor, shall not be deemed conclusive to show that the making
thereof does not constitute the doing or transacting of an insurance business. (section 2 [a], Insurance Code)
Nature of Insurance Contract
 Contract of Adhesion
 Contract of Indemnity
 Consensual
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 Voluntary
 Unilateral
 Aleatory
 Conditional
 Personal
 Property
 A contract of insurance is a contract of adhesion, thus, any ambiguity should be resolved against the insurer, or it should be construed
liberally in favor of the insured and strictly against the insurer.
 Rationale for the Rule:
Limitations of liability should be regarded with extreme jealousy and must be construed in such a way as to preclude the insurer from
non-compliance with its obligations. (DBP Pool of Accredited Insurance Co., vs. Radio Mindanao Network Inc., GR no. 147039,
January 27, 2006)
MALAYAN INSURANCE CORPORATION, petitioner, vs. THE HON. COURT OF APPEALS and TKC MARKETING
CORPORATION, respondents. (G.R. No. 119599. March 20, 1997)
Through the years, the courts have held that in these type of contracts, the parties do not bargain on equal footing, the weaker party's
participation being reduced to the alternative to take it or leave it. Thus, these contracts are viewed as traps for the weaker party whom
the courts of justice must protect. Consequently, any ambiguity therein is resolved against the insurer, or construed liberally in favor of
the insured.
GULF RESORTS, INC., petitioner, vs. PHILIPPINE CHARTER INSURANCE CORPORATION, respondent. (G.R. No. 156167.
May 16, 2005)
While it is to be liberally construed in favor of the insured, like other contracts, it must be construed according to the sense and meaning
of the terms which the parties themselves have used. If such terms are clear and unambiguous, they must be taken and understood in
their plain, ordinary and popular sense.
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Contracts of insurance are contracts of indemnity upon the terms and conditions specified in the policy. The parties have the right to
impose such reasonable conditions at the time of the making of the contract as they may deem wise and necessary.
The agreement has the force of law between the parties. The terms of the policy constitute the measure of the insurer’s liability, and in
order to recover, the insured must show himself within those terms.
If the insured cannot comply with the terms and conditions of the contract, he is not entitled as a rule to recover the loss or damage
suffered. This is a condition precedent to the right to recovery.
Contracts of insurance, like other contracts, are to be construed according to the sense and meaning of the terms which the parties
themselves have used. If such terms are clear and unambiguous, they must be taken and understood in their plain, ordinary and popular
sense. Accordingly, in interpreting the exclusions in an insurance contract, the terms used specifying the excluded classes therein are to
be given their meaning as understood in common speech. A contract of insurance is a contract of adhesion. So, when the terms of the
insurance contract contain limitations on liability, courts should construe them in such a way as to preclude the insurer from non-
compliance with his obligation. (Alpha Insurance and Surety Co. vs. Castor, GR No. 198174, September 2, 2013)
Other Nature of Contract of Insurance
 Consensual – Perfected by the meeting of the minds of the parties

 Voluntary – The parties may incorporate such terms and conditions as they may deem convenient
 Aleatory – The liability of insurer is dependent on the happening of an event which is uncertain, or though certain, is to occur at
some future undetermined time.
Exceptions to the Rule that no insurance contract takes effect unless premium is paid
1. In case of life or industrial life policy, whenever the grace period provision applies, as expressly provided by section 77 itself.
2. When the insurer acknowledged in the policy or contract of insurance itself the receipt of premium, even if premium has not been
actually paid, as expressly provided by section 78 itself.
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3. Where the parties agreed that premium payments shall be in installments and partial payment has been made at the time of loss;
4. Where the insurer granted the insured a credit term of payment of the premium, and loss occurs before the expiration of the term;
5. Where the insurer is in estoppel as when it has consistently granted a 60 to 90 days credit term for the payment of premiums. ( Gaisano
vs. Development Insurance and Surety Corporation, GR no. 190702, February 27, 2017)
What may be insured?
Any contingent or unknown event, whether past or future, which may damnify a person having insurable interest, or create a liability
against him, may be insured against. (section 3, Insurance Code)
An insurance for or against the drawing of any lottery, or for or against any chance or ticket in a lottery drawing a prize is NOT allowed.
(section 4, Insurance Code)
 Consent of the husband is not necessary for the validity of an insurance policy taken out by a married woman on her life and that of
her children.
 A minor of 18 years or more may contract for life, health and accident insurance, provided that the insurance is taken on his own life
and the beneficiary is the minor’s father, mother, husband, wife, child, brother or sister.
 All rights, title and interest in the policy of insurance taken out by an original owner on the life or health of a minor shall
automatically vest in the minor upon the death of the original owner.
Parties to a Contract of Insurance
 Every person, partnership, association or corporation duly authorized to transact insurance business may be an insurer. (section 6,
Insurance Code)
 Insurer – Party who assumes or accepts the risk of loss and undertakes for a consideration to indemnify another on the happening of
a specified contingency or event.
 Insurance Corporation - Corporations formed or organized to save any person or persons or other corporations harmless from loss,
damage, or liability arising from any unknown or future or contingent event, or to indemnify or to compensate any person or persons or
other corporations for any such loss, damage, or liability, or to guarantee the performance of or compliance with contractual obligations
or the payment of debt of others shall be known as "insurance corporations".
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The provisions of the Corporation Law shall apply to all insurance corporations now or hereafter engaged in business in the Philippines
insofar as they do not conflict with the provisions of this chapter (section 185, Insurance Code)
 SECTION 186. No person, partnership, or association of persons shall transact any insurance business in the Philippines except as
agent of a person or corporation authorized to do the business of insurance in the Philippines, unless possessed of the capital and assets
required of an insurance corporation doing the same kind of business in the Philippines and invested in the same manner ; nor unless the
Commissioner shall have granted to him or them a certificate to the effect that he or they have complied with all the provisions of law
which an insurance corporation doing business in the Philippines is required to observe.
 Every person, partnership, or association receiving any such certificate of authority shall be subject to the insurance laws of the
Philippines and to the jurisdiction and supervision of the Commissioner in the same manner as if an insurance corporation authorized by
the laws of the Philippines to engage in the business of insurance specified in the certificate.
 SECTION 187. No insurance company shall transact any insurance business in the Philippines until after it shall have obtained a
certificate of authority for that purpose from the Commissioner upon application therefor and payment by the company concerned of the
fees hereinafter prescribed.
 Insured – The person in whose favor the contract is operative and who is indemnified against or is to receive a certain sum upon the
happening of a specified contingency or event. Anyone except a public enemy may be insured. (section 7, Insurance Code)
A suretyship contrat is deemed an insurance only if the surety’s main business is that of suretyship, and not where the contract is merely
incidental to another legitimate business or activity of the surety. (Sections 2[1] and [2], Insurance Code)
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 Public Enemy
FILIPINAS COMPAÑIA DE SEGUROS, petitioner, vs. CHRISTERN, HUENEFELD & CO., INC., respondent. (G.R. No. L-
2294. May 25, 1951)
There is no question that majority of the stockholders of the respondent corporation were German subjects. This being so, we have to
rule that said respondent became an enemy corporation upon the outbreak of the war between the United States and Germany.
Cestui Que Vie – Person on whose life the insurance is written.
Beneficiary – Person designated to receive the proceeds of the policy when the risk attaches.
Kinds of Beneficiary
1 Insured himself
2 Third Person who paid consideration
- Third person through mere bounty of insured
 SECTION 11. The insured shall have the right to change the beneficiary he designated in the policy unless he
has expressly waived this right in said policy.
 SECTION 12. The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is
the principal, accomplice, or accessory in willfully bringing about the death of the insured; in which event, the
nearest relative of the insured shall receive the proceeds of said insurance if not otherwise.
 Beneficiary acquires a vested right in the policy.
SECTION 181. A policy of insurance upon life or health may pass by transfer, will or succession to any person, whether he has an
insurable interest or not, and such person may recover upon it whatever the insured might have recovered.
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 Note Articles 43 (4), 50 and 64 of the Family Code – Innocent spouse may revoke the designation of the other spouse who acted in
bad faith as beneficiary, even if such designation be stipulated as irrevocable.
Rules in case beneficiary predeceases insured
 Irrevocable designation of Beneficiary – Beneficiary has acquired vested right; Legal representatives are entitled to the proceeds as
assets of his estate; Unless, the proceeds were made payable to the beneficiary only if living.
 Revocable – Proceeds past to the estate of the insured
 All rights, title and interest in the policy of insurance taken out by an original owner on the life or health of a minor shall
automatically vest in the minor upon the death of the original owner, unless otherwise provided for in the policy.
 SECTION 10. Every person has an insurable interest in the life and health:
(a.) Of himself, of his spouse and of his children;
(b.) Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest;
(c.) Of any person under a legal obligation to him for the payment of money, or respecting property or services, of which death
or illness might delay or prevent the performance; and
(d.) Of any person upon whose life any estate or interest vested in him depends.
 An insurable interest is one of the most basic and essential requirements in an insurance contract. In general, an insurable interest is
that interest which a person is deemed to have in the subject matter insured, where he has a relation or connection with or concern
in it, such that the person will derive pecuniary benefit or advantage from the preservation of the subject matter insured and will
suffer pecuniary loss or damage from its destruction, termination, or injury by the happening of the event insured against.
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3. The existence of an insurable interest gives a person the legal right to insure the subject matter of the policy of insurance. Section
10 of the Insurance Code indeed provides that every person has an insurable interest in his own life. Section 19 of the same code
also states that an interest in the life or health of a person insured must exist when the insurance takes effect but need not exist
thereafter or when the loss occurs.
Insurable Interest in Life
 General Rule : Must exist when the insurance takes effect, but need not exist thereafter or when the loss occurs. (section 19,
Insurance Code)
 Exceptions:
1. When the insurance is taken by the creditor on the life of the debtor, the creditor is required to have insurable interest not only at
the contract but also at the time of the debtor’s death.
2. When the insurance is taken by the employer on the life of the employee.
Insurable Interest in Property
 SECTION 13. Every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such
nature that a contemplated peril might directly damnify the insured, is an insurable interest.
 SECTION 14. An insurable interest in property may consist in:
(a.) An existing interest;
(b.) An inchoate interest founded on an existing interest; or
(c.)An expectancy, coupled with an existing interest in that out of which the expectancy arises.
 SECTION 15. A carrier or depository of any kind has an insurable interest in a thing held by him as such, to the extent of his
liability but not to exceed the value thereof.
 SECTION 16. A mere contingent or expectant interest in anything, not founded on an actual right to the thing, nor upon any valid
contract for it, is not insurable.
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 SECTION 17. The measure of an insurable interest in property is the extent to which the insured might be damnified by loss or
injury thereof.
 SECTION 18. No contract or policy of insurance on property shall be enforceable except for the benefit of some person having an
insurable interest in the property insured.
 SECTION 19. An interest in property insured must exist when the insurance takes effect, and when the loss occurs, but need not
exist in the meantime; and interest in the life or health of a person insured must exist when the insurance takes effect but need not exist
thereafter or when the loss occurs.
• Existing Interest – May be legal title or equitable title (e.g. Trustee / Mortgagor / Lessor / Mortgagee)
• Inchoate Interest - Stockholder’s inchoate interest in properties of the corporation
Inchoate – a legal right or entitlement that is only partial and incomplete, which may later develop into a full property right.
Change of Interest
 Sections 20 – 24, Insurance Code
 Rules when insurable interest changes during the course of an insurance policy
 What may be transferred or assigned:
1. Thing insured (section 20)
2. The Policy itself (section 58)
3. The claim itself (section 83)
 SECTION 20. Except in the cases specified in the next four sections, and in the cases of life, accident, and health insurance, a
change of interest in any part of a thing insured unaccompanied by a corresponding change of interest in the insurance, suspends the
insurance to an equivalent extent, until the interest in the thing and the interest in the insurance are vested in the same person.
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 SECTION 21. A change in interest in a thing insured, after the occurrence of an injury which results in a loss, does not affect the
right of the insured to indemnity for the loss.
Doctrine of Subrogation in Insurance
Subrogation is the substitution of one person by another with reference to a lawful claim or right, so that he who is substituted succeeds
to the rights of the other in relation to a debt or claim, including its remedies or securities. This principle covers a situation wherein an
insurer has paid a loss under the insurance policy is entitled to all the rights and remedies belonging to the insured against a third party
with respect to any loss covered by the policy. It contemplates full substitution such that it places the party subrogated in the shoes of the
creditor, and he may use all means that the creditor could employ to enforce payment. Payment by the insurer to the insured operates as
an equitable assignment to the insurer of all the remedies that the insured may have against the third party whose negligence or wrongful
act caused the loss. (Keppel Cebu Shipyard Inc.., vs. Pioneer Insurance and Surety Corporation, GR no. 180880-81, September 25,
2009)
Concealment and Representation

 Concealment – There is concealment where the insured has knowledge of facts, material to the risk, and good faith and fair dealing
require him to reveal them, and he fails to do so.
SECTION 26. A neglect to communicate that which a party knows and ought to communicate, is called a concealment.
 Representation – A statement incidental to the contract of insurance relative to some fact having reference thereto and upon the faith
of which the contract is entered into.
SECTION 44. A representation is to be deemed false when the facts fail to correspond with its assertions or stipulations.
 Relevant Provisions of Law
Sections 26 to 48, Insurance Code
 Both take place before the contract is entered into;
 Both give rise to the same remedy: discovery of the concealment or misrepresentation before loss or death will entitle the insurer
to cancel the policy, except where there is an incontestability clause.
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SECTION 27. A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance.
 General Rule: If concealment or misrepresentation is discovered before loss or death, then the insurer can cancel the policy. If it
is discovered after death or loss, the company can refuse to pay.
SECTION 48. Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this chapter, such right
must be exercised previous to the commencement of an action onrty the contract.
After a policy of life insurance made payable on the death of the insured shall have been in force during the lifetime of the insured for a
period of two years from the date of its issue or of its last reinstatement, the insurer cannot prove that the policy is void ab initio or is
rescindable by reason of the fraudulent concealment or misrepresentation of the insured or his agent.
 Intentional or fraudulent omission to communicate information
 Rationale: The basis of the rule vitiating the contract in cases of concealment is that it misleads or deceives the insurer into
accepting the risk or accepting it at the rate of premium agreed upon. The insurer, relying upon the belief that the assured will disclose
every material fact within his actual or presumed knowledge, is misled into a belief that the circumstance withheld does not exist, and he
is thereby induced to estimate the risk upon a false basis that it does not exist.
Bernardo Argente vs. West Coast Life Insurance Co., (G.R. No. 28499, March 19, 1928)
 EXCEPTION
SECTION 48 (2nd paragraph)
After a policy of life insurance made payable on the death of the insured shall have been in force during the lifetime of the insured for a
period of two years from the date of its issue or of its last reinstatement, the insurer cannot prove that the policy is void ab initio or is
rescindable by reason of the fraudulent concealment or misrepresentation of the insured or his agent.
 Incontestability clause
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 The so-called "incontestability clause" precludes the insurer from raising the defenses of false representations or concealment of
material facts insofar as health and previous diseases are concerned if the insurance has been in force for at least two years during the
insured's lifetime.
Emilio Tan vs. Court of Appeals (G.R. No. 48049, June 29, 1989)
 The "Incontestability Clause" under Section 48 of the Insurance Code provides that an insurer is given two years – from the
effectivity of a life insurance contract and while the insured is alive – to discover or prove that the policy is void ab initio or is
rescindable by reason of the fraudulent concealment or misrepresentation of the insured or his agent. After the two-year period lapses, or
when the insured dies within the period, the insurer must make good on the policy, even though the policy was obtained by fraud,
concealment, or misrepresentation.
Manila Bankers Life Insurance Corporation vs. Cresencia P. Aban (G.R. No. 175666, July 29, 2013)
 Under Section 227 (j) of Insurance Code
The policyholder shall be entitled to have the policy reinstated at any time within three years from the date of default of premium
payment unless the cash surrender value has been duly paid, or the extension period has expired, upon production of evidence of
insurability satisfactory to the company and upon payment of all overdue premiums and any indebtedness to the company upon said
policy, with interest rate not exceeding that which would have been applicable to said premiums and indebtedness in the policy years
prior to reinstatement.
 Exceptions to the Exception:

1. Non-Payment of premiums (Section 227)
2. Violation of condition re military/naval service in time of war
3. No insurable interest
4. Cause of death was excepted or not covered
5. Fraud of vicious type
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6. Proof of death was not given
Warranties
 A statement in the policy, part of the contract, a condition on which the contract depends and is conclusively presumed material, it is
the essence of warranty that its breach bars recovery even though the breach has nothing to do with the loss. (sections 67 to 76,
Insurance Code)
 SECTION 67. A warranty is either expressed or implied.
 SECTION 68. A warranty may relate to the past, the present, the future, or to any or all of these.
 SECTION 69. No particular form of words is necessary to create a warranty.
 SECTION 70. Without prejudice to section fifty-one, every express warranty, made at or before the execution of a policy, must be
contained in the policy itself, or in another instrument signed by the insured and referred to in the policy as making a part of it.
 SECTION 71. A statement in a policy of matter relating to the person or thing insured, or to the risk, as a fact, is an express warranty
thereof.
 SECTION 72. A statement in a policy, which imparts that it is intended to do or not to do a thing which materially affects the risk, is
a warranty that such act or omission shall take place.
Losses, Claims and Proceeds
 SECTION 83. An agreement not to transfer the claim of the insured against the insurer after the loss has happened, is void if made
before the loss except as otherwise provided in the case of life insurance.
 SECTION 80. If a peril insured against has existed, and the insurer has been liable for any period, however short, the insured is not
entitled to return of premiums, so far as that particular risk is concerned.
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 Types of Losses Compensable:

1. Actual Total Loss entitles insured to full recovery
2. Constructive Total Loss when insured exercised right of abandonment. This right may be exercised when the property
insured suffers a damage from a marine peril of at least ¾ if insured merely notifies insurer of his exercise of right of
abandonment, immediately ownership over damaged property passes to insurer and it pays the insured as if there is actual total
loss.
3. Partial Loss carries with it co-insurance; owner shall bear part of the loss.
Over Insurance
 SECTION 82. In case of an over-insurance by several insurers, the insured is entitled to a ratable return of the premium, proportioned
to the amount by which the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk.
 There is over insurance when the insured insures the same property for an amount greater than the value of the property with the
same insurance company.
In case of loss, the company is bound to pay only to the extent of the real value of the property lost. The insured is entitled to recover the
amount of premium corresponding to the excess in value of the property.
Double Insurance
 SECTION 94. Where the insured is over-insured by double insurance:
a) The insured, unless the policy otherwise provides, may claim payment from the insurers in such order as he may select, up to the
amount for which the insurers are severally liable under their respective contracts;
b) Where the policy under which the insured claims is a valued policy, the insured must give credit as against the valuation for any sum
received by him under any other policy without regard to the actual value of the subject matter insured;
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c) Where the policy under which the insured claims is an unvalued policy he must give credit, as against the full insurable value, for any
sum received by him under any policy;
d) Where the insured receives any sum in excess of the valuation in the case of valued policies, or of the insurable value in the case of
unvalued policies, he must hold such sum in trust for the insurers, according to their right of contribution among themselves;
e) Each insurer is bound, as between himself and the other insurers, to contribute ratably to the loss in proportion to the amount for which
he is liable under his contract.
Reinsurance
 SECTION 95. A contract of reinsurance is one by which an insurer procures a third person to insure him against loss or liability by
reason of such original insurance.
 REINSURANCE TREATY AND REINSURANCE POLICY, DISTINGUISHED. — A reinsurance policy is a contract of
indemnity one insurer makes with another to protect the first insurer from a risk it has already assumed, while a reinsurance treaty is
merely an agreement between two insurance companies whereby one agrees to cede and the other to accept reinsurance business
pursuant to provisions specified in the treaty.
Reinsurance treaties and reinsurance policies are not synonymous. Treaties are contracts for insurance while reinsurance policies are
contracts of insurance.
 SECTION 96. Where an insurer obtains reinsurance, except under automatic reinsurance treaties, he must communicate all the
representations of the original insured, and also all the knowledge and information he possesses, whether previously or subsequently
acquired, which are material to the risk.
 SECTION 97. A reinsurance is presumed to be a contract of indemnity against liability, and not merely against damage.
 SECTION 98. The original insured has no interest in a contract of reinsurance.
Fire Insurance
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 A contract by which the insurer for a consideration agrees to indemnify the insured against loss of, or damage to, property by hostile
fire, including lss by lighting, windstorm, tornado or earthquake, and other allied risks, when such risks are covered by extension to fire
insurance policies or under separate policies. (Section 167)
How do you recover from Fire Insurance
1. Provide NOTICE OF LOSS – this must be immediately given, unless delay is waived expressly or impliedly by the insurer; and
2. Provide PROOF OF LOSS – based on best evidence obtainable, unless delay is waived expressly or impliedly by the insurer.
Measure of Indemnity
1. OPEN POLICY – entitled to recover only the expense necessary to replace the thing lost or injured in the condition it was at the time
of the injury.
2. VALUED POLICY – the parties are bound by the valuation, in the absence of fraud or mistake.
X constructed a house for which he spent P300,000.00 which he insured against fire for the same amount. When built, the house was
already worth P600,000.00. However, one day, 1/5 of the house was destroyed by accidental fire. How much can X recover ?
 If policy is an open policy, X can recover his actual loss of P120,000.00, which is 1/5 of P600,000.00, the value of the property at
the time of loss.
 If the policy is a valued policy, and the house was valued at P300,000.00, X can recover only 1/5 of P300,000.00 or P60,000.00.
 Alteration in the use of the thing insured made without the consent of the insurer entitles the latter to rescind the contract of
insurance.
Requisites for rescission in case of alteration

1. The use or condition of the thing is specifically limited or stipulated in the policy;
2. Such use or condition as limited by the policy is altered;
3. The alteration is made without the consent of the insurer;
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4. The alteration is made by means within the control of the insured;
5. The alteration increases the risk; (section 168); and
6. There must be a violation of a policy provision.
 An alteration in the risk or condition of the thing insured which does not increase the risk will not affect a contract of fire insurance.
 Under section 75, the insurer is given the right to insert terms and conditions in the policy which if violated would avoid it. An alteration
made in the use or condition of the thing insured will thus avoid a policy under the same section if such alteration is expressly prohibited
altough it does not increase the risk.
Rule on pledge, hypothecate or transfer fire policy
 As a rule, after a loss has occured, insured may pledge, hypothecate or transfer a fire insurance policy or rights thereunder. This he
may even do so even without the consent of or notice to the insurer. In such case, it is not the personal contract which is being assigned,
but a claim under or a right of action on the policy against the insurer.
 This rule however is subject to the provisions of Section 173 of the Insurance Code.
 No policy of fire insurance shall be pledged, hyothecated, or transferred to any person, firm or company who acts as agent for or
otherwise represents the issuing company, and any such pledge, hypothecation, or transfer hereacter made shall be void and of no effect
insofar as it may affect other creditors of the insured. (section 173, Insurance Code)
OPTION TO REBUILD CLAUSE
 Section 172 of the Insurance Code.
 Insurer may have the option to reinstate or replace the property damaged or destroyed any part thereof, instead of paying the amount
of the loss or damage.
 Reserved by the insurer in order to protect himself from unfairness in the appraisal and award rendered by arbitrators, in case of loss.
This option must be exercised within a stipulated period or within a reasonable time.
CASUALTY INSURANCE
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 Section 174, Insurance Code
 Casualty Insurance includes all forms of insurance against loss or liability arising from accident or mishap which are not within the
scope of other types of insurance, namely: marine, fire, surety, ship and life.
Example : Robbery and theft insurance, accident insurance
 Liability Insurance is a contract of indemnity for the benefit of the insured and those in privity with him, or those to whom the law upon
the grounds of public policy extends the indemnity against liability
Section 174 defines casualty insurance by process of elimination.
 Applies to almost any kind of insurance
 Includes therfore any loss or damage when an accident is the cause of loss
 The terms 'accident' and 'accidental', as used in insurance contracts have not acquired any technical meaning and are construed by
the courts in their ordinary and common acceptation. Thus, the terms have been taken to mean that which happen by chance or
fortuitously, without intention and design, and which is unexpected, unusual, and unforeseen. An accident is an event that takes place
without one's foresight or expectation — an event that proceeds from an unknown cause or is an unusual effect of a known cause and,
therefore, not expected." [G.R. No. 100970. September 2, 1992.] FINMAN GENERAL ASSURANCE CORPORATION, petitioner, vs.
THE HONORABLE COURT OF APPEALS and JULIA SURPOSA, respondents.]
 There is no accident when a deliberate act is performed unless some additional, unexpected, independent, and unforeseen
happening occurs which produces or brings about the result of injury or death. In other words, where the death or injury is not the
natural or probable result of the insured's voluntary act, or if something unforeseen occurs in the doing of the act which produces the
injury, the resulting death is within the protection of the policies insuring against death or injury from accident." [De la Cruz vs. Capital
Insurance & Surety Co., Inc., 17 SCRA 559 (1966)].
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Two General Divisions of Casualty Insurance
1. Accident or Health Insurance
Insurance against specified perils which may affect the person and/or property of the insured
Examples - personal accident, robbery/theft insurance
2. Third Party Liability – Insurance against specified perils which may give rise to liability on the part of the insured for claims for
injuries or damage to property of others.
a. Insurance against specified perils which may affect the person and/or property of the insured
b. Insurance against specified perils which may give rise to liability on the part of the insured for claims for injuries to others or
damage to their property.
Insurable Interest in Casualty Insurance
The insurable interest is to be found in the interest of the insured has in the safety of the person or property who may maintain, or in the
freedom from damage of property which may become the basis of suits against him in case of their injury or destruction.
The insurable interest does not depend upon whether the insured has a legal or equitable interest in property but upon whether he may be
charged at law with liability against which insurance is taken out.
 Attaches when the liability of the insured attaches, regardless of actual loss at that time.
 The right of the person injured to sue the insurer of the party at fault (insured) depends on whether the contract of insurance is
intended to benefit third persons also or only the insured.
Subject to two tests:

P a g e | 35
1. Where the contract provides for indemnity against liability to third persons, then third persons to whom the insured is liable, can
sue the insurer.
2. Where the contract is for indemnity against actual loss or payment then third persons cannot proceed against the insurer , the
contract being solely to reimburse the insured for liability actually discharged by him through payment to third persons, said third
person’s recourse being limited to the insured alone.
Compulsory Motor Vehicle Liability Insurance
 Sections 373 – 389, Insurance Code of the Philippines

 A protection coverage that will answer for legal liability for losses and damages for bodily injuries or property damage that may be
sustained by another arising from the use and operation of a motor vehicle by its owner.
 SECTION 373. For purposes of this chapter:
(a.) "Motor Vehicle" is any vehicle as defined in section three, paragraph (a) of Republic Act Numbered Four Thousand One
Hundred Thirty-Six, otherwise known as the "Land Transportation and Traffic Code;
RA 4136, as amended, provides:
SECTION 3. Words and phrases defined. — As used in this Act:
(b.) "Motor Vehicle" shall mean any vehicle propelled by any power other than muscular power using the public highways, but
excepting road rollers, trolley cars, street-sweepers, sprinklers, lawn mowers, bulldozers, graders, fork-lifts, amphibian trucks, and
cranes if not used on public highways, vehicles which run only on rails or tracks, and tractors, trailers and traction engines of all kinds
used exclusively for agricultural purposes.
(c.)Trailers having any number of wheels, when propelled or intended to be propelled by attachment to a motor vehicle, shall be classified
as separate motor vehicle with no power rating.
(d.) "Third Party" is any person other than a passenger as defined in this section and shall also exclude a member of the household,
or a member of the family within the second degree of consanguinity or affinity, of a motor vehicle owner or land transportation
P a g e | 36
operator, as likewise defined herein, or his employee in respect of death or bodily injury, arising out of and in the course of
employment”
(e.) "Owner" or "Motor Vehicle Owner" means the actual legal owner of a motor vehicle, in whose name such vehicle is duly
registered with the Land Transportation Commission;
(f.) "Land transportation operator" means the owner or owners of motor vehicles for transportation of passengers for compensation,
including school buses
 The injured for whom the contract of insurance is intended can sue directly the insurer. The general purpose of statutes enabling
an injured person to proceed directly against the insurer is to protect injured persons against the insolvency of the insured who
causes such injury, and to give such injured person a certain beneficial interest in the proceeds of the policy, and statutes are to
be liberally construed so that their intended purpose may be accomplished. It has even been held that such a provision creates a
contractual relation which inures to the benefit of any and every person who may be negligently injured by the named insured as if such
injured person were specifically named in the policy. (S 449 7 Am. Jur., 2d, pp. 118-119)
 SECTION 374. It shall be unlawful for any land transportation operator or owner of a motor vehicle to operate the same in the
public highways unless there is in force in relation thereto a policy of insurance or guarantee in cash or surety bond issued in
accordance with the provisions of this chapter.
 SECTION 375. The Commissioner shall furnish the Land Transportation Commissioner with a list of insurance companies
authorized to issue the policy of insurance or surety bond required by this chapter.
 SECTION 376. The Land Transportation Commission shall not allow the registration or renewal of registration of any motor vehicle
without first requiring from the land transportation operator or motor vehicle owner concerned the presentation and filing of a
substantiating documentation in a form approved by the Commissioner evidencing that the policy of insurance or guaranty in cash or
surety bond required by this chapter is in effect.
P a g e | 37
 [G.R. No. 60506. August 6, 1992.] FIGURACION VDA. DE MAGLANA, EDITHA M. CRUZ, ERLINDA M. MASESAR,
LEONILA M. MALLARI, GILDA ANTONIO and the minors LEAH, LOPE, JR., and ELVIRA, all surnamed MAGLANA,
herein represented by their mother, FIGURACION VDA. DE MAGLANA, petitioners, vs. HONORABLE FRANCISCO Z.
CONSOLACION, Presiding Judge of Davao City, Branch II, and AFISCO INSURANCE CORPORATION, respondents.
ISSUE: WHEN DOES THE INSURER’S LIABILITY IN A COMPREHENSIVE MOTOR VEHICLE LIABILITY INSURANCE ACCRUE?
"[W]here an insurance policy insures directly against liability, the insurer's liability accrues immediately upon the occurrence of the
injury or event upon which the liability depends and does not depend on the recovery of judgment by the injured party against the
insured. The underlying reason behind the third-party liability (TPL) of the Compulsory Motor Vehicle Liability Insurance is "to protect
injured persons against the insolvency of the insured who causes such injury, and to give such injured person a certain beneficial
interest in the proceeds of the policy..." (Shafer vs. Judge, RTC of Olongapo City, Br. 75, G.R. No. 78848, Nov. 14, 1988, 167 SCRA
386, 391)
Kinds of Life Insurance Policies
1. Ordinary Life Policy
 Insured is required to pay a certain fixed premium annually or at more frequent intervals throughout life and the beneficiary is
entitled to receive payment under the policy only after the death of the insured
 Also known as “whole life, regular life, or straight life policy.”
2. Limited Payment Life Policy
 Payable only upon death of the insured

 Premium is payable only during a limited period
3. Term Payment Life Policy

P a g e | 38
 Coverage only if the insured dies during a limited period
4. Endowment Policy
 Insurer binds himself to pay a fixed sum to the insured if he survives for a specified period, or if he dies within such period, to some
other person indicated.
Scope of Life Insurance
(1.) Life Insurance
(a.) Actual death
(b.) Living Death
(c.)Retirement Death
(2.) Health Insurance – When health insurance is written by life insurers, injury or illness are also viewed as casualties.
Contract of Life Annuity
 Refer to Article 2021, Civil Code
 By the aleatory contract of life annuity, the debtor binds himself to pay an annual pension or income during the life of one or
more determinate persons in consideration of a capital consisting of money or other property, whose ownership is transferred to him at
once with the burden of the income.
Life Insurance Life Annuity

The purchaser of a life insurance expects his insurer to pay The purchaser of a life annuity expects his insurer to pay
his beneficiary a specified sum upon his death. him a periodic income as long as he lives.
P a g e | 39
 Section 180 (2nd paragraph)

Every contract or pledge for the payment of endowments or annuities shall be considered a life insurance contract for purpose of this
Code.
Rule on Suicide
 Sec. 180-A. The insurer in a life insurance contract shall be liable in case of suicides only when it is committed after the policy
has been in force for a period of two years from the date of its issue or of its last reinstatement, unless the policy provides a shorter
period: Provided, however, that suicide committed in the state of insanity shall be compensable regardless of the date of commission.
Insurer is liable for suicide in the following cases:
1. Suicide is committed after the policy has been in force for a period of two (2) years from the date of its issue or of its last
reinstatement;
2. Insurance policy provides for a shorter period instead of two years; and
3. Suicide is committed in the state of insanity regardless of the date of commission, unless suicide is an excepted risk.
When is insurer not liable in cases of suicide
1. suicide is not by reason of insanity and is committed within the two year period;
2. suicide is by reason of insanity but is not among the risks assumed by the insurer regardless of the date of commission;
3. insurer can show that the policy was obtained with the intention to commit suicide even in the absence of any suicide exclusion in the
policy.
Right of insured to assign life insurance policy
 Sec. 181. A policy of insurance upon life or health may pass by transfer, will or succession to any person, whether he has an
insurable interest or not, and such person may recover upon it whatever the insured might have recovered.
P a g e | 40
 All life insurance policies are declared by law to be assignable regardless of whether the assignee has an insurable interest in the life
of the insured or not.
 Sec. 182. Notice to an insurer of a transfer or bequest thereof is not necessary to preserve the validity of a policy of insurance upon
life or health, unless thereby expressly required.
Measure of indemnity under life insurance policy
 Sec. 183. Unless the interest of a person insured is susceptible of exact pecuniary measurement, the measure of indemnity under a
policy of insurance upon life or health is the sum fixed in the policy.
- Valued policy
MARINE INSURANCE
 Ship Owner
 Cargo Owner
 Charterer
 Owner/Debtor
 Creditor/Lender
Insurable Interest in Marine Insurance
 Ship Owner
Over the vessel to the extent of its value, provided that if chartered, the recovery is only up to the amount not recoverable from the
charterer
He also has insurable interest on the expected freightage (section 103)
No insurable interest if he will be compensated by charterer for the value of the vessel, in case of loss.
P a g e | 41
 Cargo Owner
Over the cargo and expected profits (section 105)
 Creditor/Lender
Amount of the Loan
 Only Perils of the Sea, unless in case of an All Risk Policy where perils of the ship are covered as well.
PERILS OF THE SEA vs. PERILS OF THE SHIP

PERILS OF THE SEA PERILS OF THE SHIP
Includes only those casualties due to the: A loss which in the ordinary course of events, results from
the:
1. Natural and inevitable action of the sea;

1. Unusual violence
2. Ordinary wear and tear of the ship
2. Extraordinary action of the wind and wave 3. Negligent failure of the ship’s owner to provide the
P a g e | 42
vessel with the proper equipment to convey the cargo under
3. Other extraordinary causes connected with navigation ordinary conditions
Concealment in Marine Insurance

 MATTERS ALTHOUGH CONCEALED WILL NOT VITIATE THE CONTRACT EXCEPT WHEN THEY CAUSED THE
LOSS.
Section 110 of the Insurance Code
1. National Character of the Insured;
2. Liability of the thing insured to capture or detention;
3. Liability to seizure from breach of foreign laws of trade
4. Want of necessary documents; and
5. Use of false or simulated papers
P a g e | 43
DISTINCTION ON CONCEALMENT IN MARINE INSURANCE

AND OTHER INSURANCE
OTHER
MARINE
ITEM PROPERTY
INSURANCE
INSURANCE
The information
The or belief of a 3rd
information or party is not
the belief or material and
expection of need not be
Information
3rd persons in communicated
of 3rd
reference to a unless it
persons
material fact is proceeds from an
material and agent of the
must be insured whose
concealed. duty is to give
information
The
concealment of
any fact in
relation to any
of the matters
Concealment of
stated in
any material fact
section 110
will vitiate the
Effect of does not vitiate
entire contract,
concealment the entire
whether the loss
contract but
results from the
merely
risk concealed
exonerates the
insurer from a
risk resulting
from the fact
concealed
P a g e | 44
Implied Warranties
1. Seaworthiness of the ship
2. Against improper deviation
3. Against illegal venture
4. Warranty of neutrality
5. Presence of insurable interest
 Seaworthiness
- ship’s fitness to perform the service and to encounter the ordinary
perils of the voyage, contemplated by the parties to the policy.
 General Rule on Seaworthiness
The warranty of seaworthiness is complied with if the ship be
seaworthy at the time of the commencement of the risk. Prior or
subsequent unseaworthiness is not a breach of the warranty nor is it
material that the vessel arrives in safety at the end of her voyage.
 Ex ceptions to the General Rule on seaworthiness :
1. In case of Time Policy , the ship must be seaworthy at the
commencement of every voyage she may undertake during the period
of the coverage;
2. In the case of Cargo Policy, each vessel upon which the cargo is
shipped or transhipped must be seaworthy at the commencement of
each particular voyage;
3. In the case of Voyage Policy, contemplating a voyage at
different stages, the ship must be seaworthy at the commencement of
each stage of the voyage
Deviation
 Departure from the course of the voyage insured, or an
unreasonable delay in pursuing the voyage or, the commencement of an
entirely diffrerent voyage. (section 123)
 Instances of Deviation
1.Deviation from the agreed voyage;
2. Departure of vessel from the course of the sailing fixed by
mercantile usage;
3. Departure of vessel from the most natural, direct and advantegous
route if not fixed by mercantile usage
4. Unreasonable delay in pursuing the voyage;
P a g e | 45
5. Commencement of an entirely different voyage. (sections 121-123,
Insurance Code)
Proper Deviation
 When caused by circumstances outside the control of the ship
captain or ship owner
 When necessary to comply with a warranty or to avoid a peril
(REAL PERIL)
 When made in good faith to avoid a peril (NON-
EXISTING/ASSUMED PERIL)
 When made in good faith to save human life or to relieve another
vessel in distress (section 124)
Effect - In case of loss, the insurer is liable.
Improper Deviation
 Every deviation not specified in Section 124
 Effect – In case of loss or damage subsequent to an improper
deviation, the insurer is not liable. (section 124)
Loss
Rules in case of Loss
A. Total
1. Actual
1.1.Total Destruction;
1.2.Irretrievable loss by sinking or being broken up;
1.3.Damage rendering the thing valueless to the owner for the purpose for
which he held it; or
1.4.Other event which effectively deprives the owner of the possession, at
the port of destination, of the thing insured.
2. Constructive
2.1.Actual loss of more than ¾ of the value of the object;
2.2.Damage reducing, by more than ¾ of the value of the vessel and of the
cargo; and
2.3.Expense of the transshipment exceeds ¾ of the value of the cargo.
P a g e | 46
B. Partial – that which is not total (section 128)
IN CASE OF CONSTRUCTIVE TOTAL LOSS, INSURED’s

REMEDIES ARE :
1. Abandon the goods or vessel to the insurer and claim for whole
insured value; (section 139)
2. Without abandoning the vessel, claim for partial actual loss (section
155)
Abadonment - Act of the insured by which, after a constructive total
loss, he declared the relinquishment to the insurer of his interest in the
thing insured. (section 138)
REVISED SECURITIES ACT (RA 8799)

 Referred to as the “Blue Sky Law”
 State Policies (Section 2)
1. Establish a socially conscious free market that regulates itself;
2. Encourage widest participation of ownership in enterprises and
enhance democratization of wealth;
3. Promote development of the capital market;
4. Protect investors and ensure full and fair disclosure about
securities; and
5. Minimize if not totally eliminate insider trading and other
fraudulent or manipulative devices and practices which create
distortions in the free market.
Intended Effects
1. Prevention of excesses and fraudulent transactions, merely by
requirement that their details be revealed
2. Placing the market during the early stages of offering of a
security a body of information, which operating indirectly
through investment services and expert investors, will tend to
produce a more accurate appraisal of a security
P a g e | 47
Key Features
1. Requires the sale or offer for sale of any security in the
Philippines to be registered and permitted by SEC, unless such
securities are exempt securities or sold in exempt transactions;
2. Requires registration of those who participate in the offer and
sale of securities, like brokers, dealers and salesmen and
securities exchanges;
3. Provides requirements to ensure that transactions involving

securities would be pursued on sound, fair and equitable
principles and to prevent market manipulation;
4. Expanded SEC powers and functions, including the power to
promulgate rules and regulations and to exercise investigatory
powers and removed its quasi-judicial powers under PD 902-A.
Definition of securities
Securities" are shares, participation or interests in a corporation or in a
commercial enterprise or profit-making venture and evidenced by a
certificate, contract, instruments, whether written or electronic in
character. It includes:
(a.) Shares of stocks, bonds, debentures, notes evidences of
indebtedness, asset-backed securities;
(b.) Investment contracts, certificates of interest or participation in a
profit sharing agreement, certifies of deposit for a future subscription;
(c.)Fractional undivided interests in oil, gas or other mineral rights;
(d.) Derivatives like option and warrants;
(e.) Certificates of assignments, certificates of participation, trust
certificates, voting trust certificates or similar instruments
(f.) Proprietary or nonproprietary Membership certificates in corporations;
and
(g.) Other instruments as may in the future be determined by the
Commission.
Nature and Composition of SEC (Section 4)
 Collegial body, composed of a chairperson and (4) Commissioners,
appointed by the President for a term of (7) seven years each and who
P a g e | 48
shall serve as such until their successor shall have been appointed and
qualified.
 The Commissioners must be natural-born citizens of the Philippines,
at least forty (40) years of age for the Chairperson and at least thirty-
five (35) years of age for the Commissioners, of good moral character,
or unquestionable integrity, of known probity and patriotism, and with
recognized competence in social and economic disciplines: Provided,
That the majority of Commissioners, including the Chairperson, shall
be members of the Philippine Bar
SEC Powers and Functions (Section 5)

A. Have jurisdiction and supervision over all corporations, partnership or
associations who are the grantees of primary franchises and/or a license
or a permit issued by the Government;
B. Formulate policies and recommendations on issues concerning the
securities market, advise Congress and other government agencies on
all aspect of the securities market and propose legislation and
amendments thereto;
C. Approve, reject, suspend, revoke or require amendments to registration
statements, and registration and licensing applications;
D. Regulate, investigate or supervise the activities of persons to ensure
compliance;
E. Supervise, monitor, suspend or take over the activities of exchanges,
clearing agencies and other SROs;
F. Impose sanctions for the violation of laws and rules, regulations and
orders, and issued pursuant thereto;
G. Prepare, approve, amend or repeal rules, regulations and orders, and
issue opinions and provide guidance on and supervise compliance with
such rules, regulation and orders;
H. Enlist the aid and support of and/or deputized any and all enforcement
agencies of the Government, civil or military as well as any private
institution, corporation, firm, association or person in the
implementation of its powers and function under its Code;
P a g e | 49
I. Issue cease and desist orders to prevent fraud or injury to the investing
public;
J. Punish for the contempt of the Commission, both direct and indirect, in
accordance with the pertinent provisions of and penalties prescribed by
the Rules of Court;
K. Compel the officers of any registered corporation or association to call
meetings of stockholders or members thereof under its supervision;
L. Issue subpoena duces tecum and summon witnesses to appear in any
proceedings of the Commission and in appropriate cases, order the
examination, search and seizure of all documents, papers, files and
records, tax returns and books of accounts of any entity or person under
investigation as may be necessary for the proper disposition of the
cases before it, subject to the provisions of existing laws;
M. Suspend, or revoke, after proper notice and hearing the franchise or
certificate of registration of corporations, partnership or associations,
upon any of the grounds provided by law; and
N. Exercise such other powers as may be provided by law as well as those
which may be implied from, or which are necessary or incidental to the
carrying out of, the express powers granted the Commission to achieve
the objectives and purposes of these laws.
Florencio Orendain vs. BF Homes, Inc., (G.R. No. 146313, October
31, 2006)
The Commission’s jurisdiction over all cases enumerated under section
5 of Presidential Decree No. 902-A is hereby transferred to the Courts
of general jurisdiction or the appropriate Regional Trial Court:
Provided, That the Supreme Court in the exercise of its authority may
designate the Regional Trial Court branches that shall exercise
jurisdiction over the cases. The Commission shall retain jurisdiction
over pending cases involving intra-corporate disputes submitted for
final resolution which should be resolved within one (1) year from the
enactment of this Code. The Commission shall retain jurisdiction over
pending suspension of payment/rehabilitation cases filed as of 30 June
2000 until finally disposed.
Juxtaposing the jurisdiction of the RTC under RA 8799 and the powers
that were retained by the SEC, it is clear that the SEC retained its
administrative, regulatory, and oversight powers over all corporations,
partnerships, and associations who are grantees of primary franchises,
and/or a license or permit issued by the Government. However, the
Securities Regulations Code (SRC) is clear that when there is a
controversy arising out of intra-corporate relations, between and
among stockholders, members or associates, and between, any, or all
of them and the corporation, it is the RTC, not SEC, which has
jurisdiction over the case.
P a g e | 50
INTRA-CORPORATE CONTROVERSY
To determine whether a case involves an intra-corporate controversy
to be heard and decided by the RTC, two elements must concur:
1. the status or relationship of the parties and
2. the nature of the question that is subject of their controversy.
The first element requires that the controversy must arise out of intra-
corporate or partnership relations: (a) between any or all of the parties
and the corporation, partnership or association of which they are
stockholders, members or associates; (b) between any or all of them
and the corporation, partnership or association of which they are
stockholders, members or associates and (c) between such corporation,
partnership or association and the State insofar as it concerns their
individual franchises. On the other hand, the second element requires
that the dispute among the parties be intrinsically connected with the
regulation of the corporation. 15 If the nature of the controversy
involves matters that are purely civil in character, necessarily, the case
does not involve an intra-corporate controversy.
Eustacio Atwel, et al. vs. Concepcion Progressive Ass'n., Inc., (G.R.
No. 169370, April 14, 2008)
 From the above, it can be said that the SEC's regulatory authority over
private corporations encompasses a wide margin of areas, touching
nearly all of a corporation's concerns. This authority more vividly
springs from the fact that a corporation owes its existence to the
concession of its corporate franchise from the state. Under its
regulatory responsibilities, the SEC may pass upon applications for, or
may suspend or revoke (after due notice and hearing), certificates of
registration of corporations, partnerships and associations (excluding
cooperatives, homeowners' association, and labor unions); compel legal
and regulatory compliances; conduct inspections; and impose fines or
other penalties for violations of the Revised Securities Act, as well as
implementing rules and directives of the SEC, such as may be
warranted.
Provident International Resources Corp., et al. vs. Joaquin T.

Venus, et al., (G.R. No. 167041, June 17, 2008)
 At the outset, it must be emphasized that pursuant to Section 5.2 of

Republic Act No. 8799, the SEC's jurisdiction over intra-corporate
controversies has been transferred to the RTCs or Special Commercial
Courts (SCC) designated by the Court pursuant to A.M. No. 00-11-03-
SC promulgated on 21 November 2000.
P a g e | 51
In view of the said transfer of jurisdiction, the SEC Hearing Panel
which the SEC constituted and the Interim Management Committee
which the SEC Hearing Panel appointed have become functus officio.
GD Express Worldwide N.V., et al. vs. Court of Appeals, et al., G.R.

No. 136978, May 8, 2009
 It is a settled rule that jurisdiction over the subject matter is

conferred by law. The determination of the rights of a director and
corporate officer dismissed from his employment as well as the
corresponding liability of a corporation, if any, is an intra-corporate
dispute subject to the jurisdiction of the regular courts.
Leslie Okol vs. Slimmers World International, et al., (G.R. No.

160146, December 11, 2009)
 A criminal charge for violation of the Securities Regulation Code is

a specialized dispute. Hence, it must first be referred to an
administrative agency of special competence, i.e., the SEC. Under the
doctrine of primary jurisdiction, courts will not determine a
controversy involving a question within the jurisdiction of the
administrative tribunal, where the question demands the exercise of
sound administrative discretion requiring the specialized knowledge
and expertise of said administrative tribunal to determine technical and
intricate matters of fact. The Securities Regulation Code is a special
law. Its enforcement is particularly vested in the SEC. Hence, all
complaints for any violation of the Code and its implementing rules
and regulations should be filed with the SEC. Where the complaint is
criminal in nature, the SEC shall indorse the complaint to the DOJ for
preliminary investigation and prosecution as provided in Section 53.1
earlier quoted.
Manuel V. Baviera vs. Esperanza Paglinawan, et al., (G.R. Nos.

168380 & 170602, February 8, 2007)
SEC’s power on Securities Transactions
 Section 8.1 Securities shall not be sold or offered for sale or
distribution within the Philippines, without a registration statement
duly filed with and approved by the Commission. Prior to such sale,
information on the securities, in such form and with such substance as
the Commission may prescribe, shall be made available to each
prospective purchaser.
 Section 8.2. The Commission may conditionally approve the
registration statement under such terms as it may deem necessary.
 Section 8.3. The Commission may specify the terms and conditions
under which any written communication, including any summary
P a g e | 52
prospectus, shall be deemed not to constitute an offer for sale under this
Section.
 Section 8.4. A record of the registration of securities shall be kept in
Register Securities in which shall be recorded orders entered by the
Commission with respect such securities. Such register and all
documents or information with the respect to the securities registered
therein shall be open to public inspection at reasonable hours on
business days.
 Section 8.5. The Commission may audit the financial statements,
assets and other information of firm applying for registration of its
securities whenever it deems the same necessary to insure full
disclosure or to protect the interest of the investors and the public in
general.
Exceptions:
 The following securities may be sold without need of registration.
(a.) Any security issued or guaranteed by the Government of the
Philippines, or by any political subdivision or agency thereof, or by any
person controlled or supervised by, and acting as an instrumentality of
said Government.
(b.) Any security issued or guaranteed by the government of any
country with which the Philippines maintains diplomatic relations, or
by any state, province or political subdivision thereof on the basis of
reciprocity: Provided, That the Commission may require compliance
with the form and content for disclosures the Commission may
prescribe.
(c.)An isolated transaction in which any security is sold, offered for sale,
subscription or delivery by the owner therefore, or by his representative
for the owner’s account, such sale or offer for sale or offer for sale,
subscription or delivery not being made in the course of repeated and
successive transaction of a like character by such owner, or on his
account by such representative and such owner or representative not
being the underwriter of such security.\
(d.) The distribution by a corporation actively engaged in the
business authorized by its articles of incorporation, of securities to its
stockholders or other security holders as a stock dividend or other
distribution out of surplus.
(e.) The sale of capital stock of a corporation to its own stockholders
exclusively, where no commission or other remuneration is paid or
given directly or indirectly in connection with the sale of such capital
stock.
P a g e | 53
(f.) The issuance of bonds or notes secured by mortgage upon real estate
or tangible personal property, when the entire mortgage together with
all the bonds or notes secured thereby are sold to a single purchaser at a
single sale
(g.) The issue and delivery of any security in exchange for any other
security of the same issuer pursuant to a right of conversion entitling
the holder of the security surrendered in exchange to make such
conversion: Provided, That the security so surrendered has been
registered under this Code or was, when sold, exempt from the
provision of this Code, and that the security issued and delivered in
exchange, if sold at the conversion price, would at the time of such
conversion fall within the class of securities entitled to registration
under this Code. Upon such conversion the par value of the security
surrendered in such exchange shall be deemed the price at which the
securities issued and delivered in such exchange are sold.
(h.) Broker’s transaction, executed upon customer’s orders, on any
registered Exchange or other trading market.
(i.) Subscriptions for shares of the capitals stocks of a corporation prior to
the incorporation thereof or in pursuance of an increase in its
authorized capital stocks under the Corporation Code, when no expense
is incurred, or no commission, compensation or remuneration is paid or
given in connection with the sale or disposition of such securities, and
only when the purpose for soliciting, giving or taking of such
subscription is to comply with the requirements of such law as to the
percentage of the capital stock of a corporation which should be
subscribed before it can be registered and duly incorporated, or its
authorized, capital increase.
(j.) The exchange of securities by the issuer with the existing security
holders exclusively, where no commission or other remuneration is
paid or given directly or indirectly for soliciting such exchange.
(k.) The sale of securities by an issuer to fewer than twenty (20)
persons in the Philippines during any twelve-month period.
(l.) The sale of securities to any number of the following qualified buyers:
a. Bank;
b. Registered investment house;
c. Insurance company;
d. Pension fund or retirement plan maintained by the Government of the
Philippines or any political subdivision thereof or manage by a bank or
other persons authorized by the Bangko Sentral to engage in trust
functions;
e. Investment company or;
f. Such other person as the Commission may rule by determine as
qualified buyers, on the basis of such factors as financial sophistication,
P a g e | 54
net worth, knowledge, and experience in financial and business
matters, or amount of assets under management.
 Section 10.3. Any person applying for an exemption under this

Section, shall file with the Commission a notice identifying the
exemption relied upon on such form and at such time as the
Commission by the rule may prescribe and with such notice shall pay
to the Commission fee equivalent to one-tenth (1/10) of one percent
(1%) of the maximum value aggregate price or issued value of the
securities.
 Section 12.1. All securities required to be registered under
Subsection 8. I shall be registered through the filing by the issuer in the
main office of the Commission, of a sworn registration statement with
the respect to such securities, in such form and containing such
information and document as the Commission prescribe. The
registration statement shall include any prospectus required or
permitted to be delivered under Subsections 8.2, 8.3, and 8.4.
 Section 13.1. The Commission may reject a registration statement
and refuse registration of the security there-under, or revoke the
affectivity of a registration statement and the registration of the security
there-under after the due notice and hearing by issuing an order to such
effect, setting forth its finding in respect thereto, if it finds that:
Grounds for suspension
 Section 15.1. If at any time, the information contained in the
registration statement filed is or has become misleading, incorrect,
inadequate or incomplete in any material respect, or the sale or offering
for sale of the security registered thereunder may work or tend to work
a fraud, the Commission may require from the issuer such further
information as may in its judgement be necessary to enable the
Commission to ascertain whether the registration of such security
should be revoked on any ground specified in this Code. The
Commission may also suspend the right to sell and offer for the sale
such security pending further investigation, by entering an order
specifying the grounds for such action, and by notifying the issuer,
underwriter, dealer or broker known as participating in such offering
 Section 15.2. The refusal to furnish information required by the
Commission may be a ground for the issuance of an order of
suspension pursuant to Subsection 15.1. Upon the issuance of any such
order and notification to the issuer, underwriter, dealer or broken know
as participating in such offering, no further offer or sale of any such
security shall be made until the same is lifted or set aside by the
Commission. Otherwise such sale shall be void.
 15.3. Upon issuance of an order of suspension, the Commission
shall conduct a hearing. If the Commission determines that the sale of
P a g e | 55
any security should be revoked is shall issue an order prohibiting sale
of such security.
 15.4. Until the issuance of a final order, the suspension of the right
to sell, though binding upon the persons notified there of, shall be
deemed confidential, and shall not be published, unless it shall appear
that the order of suspension has been violated after notice. If, however,
the Commission finds that the sale of the security will neither be
fraudulent nor result in fraud, it shall forthwith issue an order revoking
the order of suspension, and such security shall be restored to its status
as a registered security as of the date of such order of suspension.
Protection of Shareholder Interests
1. Tender Offers (Section 19)
2. Proxy Solicitations (Section 20)
3. Internal Record Keeping and Accounting Controls (Section 22)
4. Transactions of Directors, Officers, and Principal Stockholders
(Section 23)
Tender Offer
 The legislative intent of Section 19 of the Code is to regulate
activities relating to acquisition of control of the listed company and for
the purpose of protecting the minority stockholders of a listed
corporation. Whatever may be the method by which control of a public
company is obtained, either through the direct purchase of its stocks or
through an indirect means, mandatory tender offer applies.
 Tender offer is a publicly announced intention by a person acting
alone or in concert with other persons to acquire equity securities of a
public company. A public company is defined as a corporation which is
listed on an exchange, or a corporation with assets exceeding
P50,000,000.00 and with 200 or more stockholders, at least 200 of
them holding not less than 100 shares of such company.
 Stated differently, a tender offer is an offer by the acquiring
person to stockholders of a public company for them to tender
their shares therein on the terms specified in the offer. Tender offer
is in place to protect minority shareholders against any scheme
that dilutes the share value of their investments. It gives the
minority shareholders the chance to exit the company under
reasonable terms, giving them the opportunity to sell their shares
at the same price as those of the majority shareholders.
Cemco Holdings, Inc. vs. National Life Insurance Co. of the Phil.,
Inc., (G.R. No. 171815, August 7, 2007)
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 The coverage of the mandatory tender offer rule covers not only
direct acquisition but also indirect acquisition or "any type of
acquisition".
Cemco Holdings, Inc. vs. National Life Insurance Co. of the Phil.,
Inc., (G.R. No. 171815, August 7, 2007)
 It shall be lawful for any person to make any untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements made in the light of the circumstances under
which they are made, not mis-leading, or to engaged to any fraudulent,
deceptive or manipulative acts or practices, in connection with any
tender offer or request or invitation for tenders, or any solicitation for
any security holders in opposition to or in favor of any such favor of
any such offer, request, or invitation. The Commission shall, for the
purposes of this subsection, define and prescribe means reasonably
designed to prevent, such acts and practices as are fraudulent, deceptive
and manipulative.
Proxy Solicitation
 Section 20. Proxy solicitations. - 20.1. Proxies must be issued and
proxy solicitation must be made in accordance with rules and
regulations to be issued by the Commission;
20.2. Proxies must be in writing, signed by the stockholder or his duly
authorized representative and file before the scheduled meeting with
the corporate secretary.
20.3. Unless otherwise provided in the proxy, it shall be valid only for
the meeting for which it is intended. No proxy shall be valid only for
the meting for which it is intended. No proxy shall be valid and
effective for a period longer than five (5) years at one time.
20.4. No broker or dealer shall give any proxy, consent or any
authorization, in respect of any security carried for the account of the
customer, to a person other than the customer, without written
authorization of such customer.
20.5. A broker or dealer who holds or acquire the proxy for at least ten
percent (10%) or such percentage as the commission may prescribe of
the outstanding share of such issuer, shall submit a report identifying
the beneficial owner of ten days after such acquisition, for its own
account or customer, to the issuer of security, to the exchange where
the security is traded and to the Commission.
Internal Record Keeping
Section 22. Internal Record Keeping and Accounting Control. - Every
issuer which has a class of securities that satisfies the requirements of
Subsection 17.2 shall:
P a g e | 57
22.1. Device and maintain a system of internal accounting controls
sufficient to provide reasonable assurance that: (a) Transactions and
access to assets are pursuant to management authorization; (b)
Financial statements are provided in conformity with generally
accepted accounting principles that are adopted by the Accounting
standards council and the rules promulgated by the Commission with
the regard to the preparation of the financial statements; and (c)
Recorded assets are compared with existing assets at reasonable
intervals and differences are reconciled.
Manipulative Practices and Insider Trading
Wash Sales
 To create a false or misleading appearance of active trading in any
listed security traded in an Exchange of any other trading market
(hereafter referred to purposes of this Chapter as "Exchange"):
(i) By effecting any transaction in such security which involves no
change in the beneficial ownership thereof;
(ii) By entering an order or orders for the purchase or sale of such
security with the knowledge that a simultaneous order or orders of
substantially the same size, time and price, for the sale or purchase of
any such security, has or will be entered by or for the same or different
parties; or
(iii) By performing similar act where there is no change in beneficial
ownership.
Marking the Close
 Also known as “portfolio funding”
 The practice of buying a security at the very end of the trading day
at a significantly higher price than the current price of the security. The
purpose of the practice of marking the close is to raise the closing price
of the security, making it appear to be higher-valued than it actually is.
Painting the Tape
 The illegal practice in which traders buy and sell a specific security
among themselves, creating the illusion of high trading volume and
significant investor interest, which can attract unsuspecting investors
who might then buy the stock and enable the traders to profit.
Squeezing the float
 Squeezing the float – Taking advantage of a shortage of securities in
the market by controlling the demand side and exploiting market
congestion during such shortages in a way as to create artificial prices;
 Also known as “Pump and Dump”
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 Pump and dump is a form of stock fraud in which people artificially
inflate the price of stock in order to profit.
Hype and Dump

 Also known as “Pump and Dump”
 Pump and dump is a form of stock fraud in which people artificially
inflate the price of stock in order to profit.
Improper Matched Orders
 Engaging in transactions where both the buy and sell orders are entered
at the same time with the same price and quantity by different but
colluding parties.
Boiler Room Operations
 refers to the use of high pressure sales tactics to sell stocks to clients
who are "cold called", or called randomly, most likely after being
picked out of a phone directory.
Boiler rooms are often set up in inexpensive office spaces, where

armies of telemarketers make these cold calls. While the stock they sell
may be real (most likely an unknown micro-cap stock), the information
these salespeople use to hype their product could be false or misleading
because of their overwhelming desire to sell the stock and claim
commissions.
Scalping
 "Scalping refers to recommending that others purchase a security
while secretly selling the same security in the market."
Daisy Chain
 series of manipulative transactions on a security intended to create
an impression of a high trading volume, suggesting interest in assets or
securities that may not actually be there. This tends to increase the
share price, which in turn encourages other investors to buy the
security. When other investors become interested, the manipulating
traders dump the security at an artificially high price.
Flipping
 Quick-profit strategy in which the shares of a new issue or IPO are
bought for selling immediately upon an increase in their market price
 Section 24.2. No person shall use or employ, in connection with the
purchase or sale of any security any manipulative or deceptive device
P a g e | 59
or contrivance. Neither shall any short sale be effected nor any stop-
loss order be executed in connection with the purchase or sale of any
security except in accordance with such rules and regulations as the
Commission may prescribe as necessary or appropriate in the public
interest for the protection of investors.
Regulation of Option Trading
 Section 25. Regulation of Option Trading. – No member of an

Exchange shall, directly or indirectly endorse or guarantee the
performance of any put, call, straddle, option or privilege in relation to
any security registered on a securities exchange. The terms "put",
"call", "straddle", "option", or "privilege" shall not include any
registered warrant, right or convertible security.
 Option Trading is a contract that gives the buyer the right, but not the
obligation, to buy or sell an underlying asset at a specific price on or
before a certain date.
The danger of damage to the public consists of the fact that a person to
whom an option has been given can abuse the same and control a large
number of shares for a certain period of time and thus, manipulate the
market.
INSIDER’s TRADING
GENERAL RULE:
Section 27. It shall be unlawful for an insider to sell or buy a security
of the issuer, while in possession of material information with respect
to the issuer or the security that is not generally available to the public
UNLESS:
a) The insider proves that the information was not gained from such
relationship; or
b) If the other party selling to or buying from the insider (or his agent)
is identified, the insider proves: (i) that he disclosed the information to
the other party, or (ii) that he had reason to believe that the other party
otherwise is also in possession of the information.
PRESUMPTION
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A purchase or sale of a security of the issuer made by an insider, or
such insider’s spouse or relatives by affinity or consanguinity within
the second degree, legitimate or common-law, shall be presumed to
have been effected while in possession of material non-public
information if transacted after such information came into existence but
prior to dissemination of such information to the public and the lapse of
a reasonable time for the market to absorb such information: Provided,
however, That this presumption shall be rebutted upon a showing by
the purchaser or seller that he was not aware of the material non-public
information at the time of the purchase or sale.
Who is an insider?
Someone who has access to material, nonpublic information about the
security.
 The intent of the law is the protection of investors against fraud,
committed when an insider, using secret information, takes advantage
of an uninformed investor. Insiders are obligated to disclose material
information to the other party or abstain from trading the shares of his
corporation. This duty to disclose or abstain is based on two factors:
first, the existence of a relationship giving access, directly or indirectly,
to information intended to be available only for a corporate purpose
and not for the personal benefit of anyone; and second, the inherent
unfairness involved when a party takes advantage of such information
knowing it is unavailable to those with whom he is dealing.
Defense of an Insider:
Section 30 of the Revised Securities Act allows the insider the defense
that in a transaction of securities, where the insider is in possession of
facts of special significance, such information is “generally available”
to the public. Whether information found in a newspaper, a specialized
magazine, or any cyberspace media be sufficient for the term
“generally available” is a matter which may be adjudged given the
particular circumstances of the case. The standards cannot remain at a
standstill. A medium, which is widely used today was, at some
previous point in time, inaccessible to most. Furthermore, it would be
difficult to approximate how the rules may be applied to the instant
P a g e | 61
case, where investigation has not even been started. Respondents
failed to allege that the negotiations of their agreement with GHB were
made known to the public through any form of media for there to be a
proper appreciation of the issue presented.
 Section 56 – Civil liabilities on account of false registration

statement
 Section 57 – Civil liabilities in connection with prospectus,
communications and reports
 Section 58 - Civil Liability for Fraud in Connection with Securities
Transactions
 Section 59. Civil Liability for Manipulation of Security Prices
 Section 60. Civil Liability with Respect to Commodity Futures
Contracts and Pre-need Plans
 Section 61. Civil Liability on account of insider trading.
 SEC. 62. Limitation of Actions. - 62.1. No action shall be

maintained to enforce any liability created under Section 56 or 57
of this Code unless brought within two (2) years after the discovery
of the untrue statement or the omission, or, if the action is to
enforce a liability created under Subsection 57.1(a), unless brought
within two (2) years after the violation upon which it is based. In
no event shall any such action be brought to enforce a liability
created under Section 56 or Subsection 57.1 (a) more than five (5)
years after the security was bona fide offered to the public, or
under Subsection 57.1 (b) more than five (5) years after the sale.
 62.2. No action shall be maintained to enforce any liability

created under any other provision of this Code unless brought
within two (2) years after the discovery of the facts constituting the
cause of action and within five (5) years after such cause of action
accrued.
 SEC. 63. Amount of Damages to be Awarded. - 63.1. All suits to
recover damages pursuant to Sections 56, 57, 58, 59, 60 and 61
shall be brought before the Regional Trial Court, which shall have
exclusive jurisdiction to hear and decide such suits. The Court is
hereby authorized to award damages in an amount not exceeding
triple the amount of the transaction plus actual damages.
Exemplary damages may also be awarded in cases of bad faith,

fraud, malevolence or wantonness in the violation of this Code or
the rules and regulations promulgated thereunder.

The Court is also authorized to award attorney’s fees not exceeding
thirty percentum (30%) of the award.

P a g e | 62
May the Department of Justice immediately take cognizance and
investigate cases involving violations of the Securities Regulation
Code?
No. A criminal charge for violation of the Securities Regulation Code

is a specialized dispute. Hence, it must first be referred to an
administrative agency of special competence, i.e., the SEC. Under the
doctrine of primary jurisdiction, courts will not determine a
controversy involving a question within the jurisdiction of the
administrative tribunal, where the question demands the exercise of
sound administrative discretion requiring the specialized knowledge
and expertise of said administrative tribunal to determine technical and
intricate matters of fact. The Securities Regulation Code is a special
law. Its enforcement is particularly vested in the SEC. Hence, all
complaints for any violation of the Code and its implementing rules
and regulations should be filed with the SEC. Where the complaint is
criminal in nature, the SEC shall indorse the complaint to the DOJ for
preliminary investigation and prosecution.
What is the Howey Test?
The Howey Test is applied to determine whether an investment

contract shall be required as a security to be registered under the
Securities Regulation Code. The Securities Regulation Code treats
investment contracts as securities that have to be registered with the
SEC before they can be distributed and sold. An investment contract is
a contract, transaction, or scheme where a person invests his money in
a common enterprise and is led to expect profits primarily from the
efforts of others.
The United States Supreme Court held in Securities and Exchange

Commission v. W.J. Howey Co.that, for an investment contract to exist,
the following elements, referred to as the Howey test must concur: (1) a
contract, transaction, or scheme; (2) an investment of money; (3)
investment is made in a common enterprise; (4) expectation of profits;
and (5) profits arising primarily from the efforts of others
What is a public company?
A “public company,” as contemplated by the SRC is not limited to a

company whose shares of stock are publicly listed; even companies
whose shares are offered only to a specific group of people, are
considered a public company, provided they fall under Subsec. 17.2 of
the SRC, which provides: “any corporation with a class of equity
P a g e | 63
securities listed on an Exchange or with assets of at least Fifty Million
Pesos (P50,000,000.00) and having two hundred (200) or more holders,
at least two hundred (200) of which are holding at least one hundred
(100) shares of a class of its equity securities.” Philippine Veterans
Bank meets the requirements and as such, is subject to the reportorial
requirements for the benefit of its shareholders.
SEC vs. Prosperity (2012) in relation to Howey and Turner Test to

determine whether an investment contract is a “security”.
SEC Prosperity.Com, Inc. (PCI) sold computer software and hosted

websites without providing internet service. To make a profit, PCI
devised a scheme in which, for the price of US$234.00 (subsequently
increased to US$294), a buyer could acquire from it an internet website
of a 15-Mega Byte (MB) capacity. At the same time, by referring to
PCI his own down-line buyers, a first-time buyer could earn
commissions, interest in real estate in the Philippines and in the United
States, and insurance coverage worth P50,000.00.
To benefit from this scheme, a PCI buyer must enlist and sponsor at
least two other buyers as his own down-lines. These second tier of
buyers could in turn build up their own down-lines. For each pair of
down-lines, the buyer-sponsor received a US$92.00 commission. But
referrals in a day by the buyer-sponsor should not exceed 16 since the
commissions due from excess referrals inure to PCI, not to the buyer-
sponsor.
PCI appears to be engaged in network marketing, a scheme adopted by

companies for getting people to buy their products outside the usual
retail system where products are bought from the stores shelf. Under
this scheme, adopted by most health product distributors, the buyer can
become a down-line seller. The latter earns commissions from
purchases made by new buyers whom he refers to the person who sold
the product to him. The network goes down the line where the orders to
buy come.
The commissions, interest in real estate, and insurance coverage

worth P50,000.00 are incentives to down-line sellers to bring in other
customers. These can hardly be regarded as profits from investment of
money under the Howey test.
The Supreme Court recognized there were two tests in determining

whether a contract was an investment contract.
P a g e | 64
The first is the Howey test, which traces its roots to the SEC v. W.J.
Howey Co. (328 US 293 [1946]) case in the United States. The
decision held that a contract, transaction or scheme is an investment
contract where a person (a) invests his money (b) in a common
enterprise (c) with an expectation of profits (d) solely from the efforts
of others.
The other test is the Turner test based on a later case at the Court of
Appeals—SEC vs. Turner (474 F.2d 476, 9th Cir. 1973)—which
basically has the same elements as the Howey test except that the profit
was described “primarily” from the efforts of others.
What is Tender Offer?
A tender offer is an offer by the acquiring person to stockholders of a

public company for them to tender their shares; it gives the minority
shareholders the chance to exit the company under reasonable terms,
giving them the opportunity to sell their shares at the same price as
those of the majority shareholders. The mandatory tender offer is still
applicable even if the acquisition, direct or indirect, is less than 35%
when the purchase would result in ownership of over 51% of the total
outstanding equity securities of the public company.
FOREIGN INVESTMENTS ACT
 Republic Act No. 8179
AN ACT TO FURTHER LIBERALIZE FOREIGN INVESTMENTS,

AMENDING FOR THE PURPOSE REPUBLIC ACT NO. 7042, AND
FOR OTHER PURPOSES
 RA 7042, SEC. 2. Declaration of Policy. - It is the policy of the

State to attract, promote and welcome productive investments from
foreign individuals, partnerships, corporations, and governments,
including their political subdivisions, in activities which significantly
contribute to national industrialization and socio-economic
development to the extent that foreign investment is allowed in such
activity by the Constitution and relevant laws. Foreign investments
shall be encouraged in enterprises that significantly expand livelihood
and employment opportunities for Filipinos; enhance economic value
of farm products; promote the welfare of Filipino consumers; expand
the scope, quality and volume of exports and their access to foreign
markets; and/or transfer relevant technologies in agriculture, industry
and support services. Foreign investments shall be welcome as a
P a g e | 65
supplement to Filipino capital and technology in those enterprises
serving mainly the domestic market.
 As a general rule, there are no restrictions on extent of foreign

ownership of export enterprises. In domestic market enterprises,
foreigners can invest as much as one hundred percent (100%) equity
except in areas included in the negative list. Foreign owned firms
catering mainly to the domestic market shall be encouraged to
undertake measures that will gradually increase Filipino participation
in their businesses by taking in Filipino partners, electing
Filipinos to the board of directors, implementing transfer of technology
to Filipinos, generating more employment for the economy and
enhancing skills of Filipino workers.
 “Investment” shall mean equity participation in any enterprise

organized or existing under the laws of the Philippines.
 “Foreign investment” shall mean an equity investment made by a

non-Philippine national in the form of foreign exchange and/or other
assets actually transferred to the Philippines and duly registered with
the Central Bank which shall assess and appraise the value of such
assets other than foreign exchange.
 Foreign Investments Negative List” or “Negative List” shall mean

a list of areas of economic activity whose foreign ownership is limited
to a maximum of forty percent (40%) of the equity capital of the
enterprises engaged therein.
 “Philippine national” shall mean a citizen of the Philippines, or a

domestic partnership or association wholly owned by citizens of the
Philippines; or a corporation organized under the laws of the
Philippines of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as doing
business in the Philippines under the Corporation Code of which one
hundred percent (100%) of the capital stock outstanding and entitled to
vote is wholly owned by Filipinos or a trustee of funds for pension or
other employee retirement or separation benefits, where the trustee is a
Philippine national and at least sixty percent (60%) of the fund will
accrue to the benefit of Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own stocks in a Securities
and Exchange Commission (SEC) registered enterprise, at least sixty
percent of the capital stock outstanding and entitled to vote of each of
both corporations must be owned and held by citizens of the
Philippines, in order that the corporation shall be considered a
Philippine national."
P a g e | 66
 SEC. 4. Scope. – This Act shall not apply to banking and other
financial institutions which are governed and regulated by the General
Banking Act and other laws under the supervision of the Central Bank.
 Sec. 7. Foreign Investments in Domestic Market Enterprises. - Non-

Philippine nationals may own up to one hundred percent (100%) of
domestic market enterprises unless foreign ownership therein is
prohibited or limited by the Constitution and existing law or the
Foreign Investment Negative List under Section 8 hereof."
 SEC.9. Investment Rights of Former Natural-born Filipinos. -

For purposes of this Act, former natural born citizens of the Philippines
shall have the same investment rights of Philippine citizen in
Cooperatives under Republic Act No. 6938, Rural Banks under
Republic Act No. 7353, Thrift Banks and Private Development Banks
under Republic Act No. 7906, and Financing Companies under
Republic Act No. 5980. These rights shall not extend to activities
reserved by the Constitution including (1) the exercise of profession;
(2) in defense-related activities under Section 8 (b) hereof, unless
specifically authorized by the Secretary of National Defense; and (3)
activities covered by Republic Act No. 1180 (Retail Trade Act),
Republic Act No. 5487 (Security Agency Act), Republic Act No. 7076
(Small Scale Mining Act), Republic Act No. 3018, as amended (Rice
and Corn Industry Act), and P.D. 449 (Cockpits Operation and
Management)".
 SEC. 10. Other Rights of natural Born Citizen Pursuant to the

Provisions of Article XII, Section 8 of the Constitution. - Any
natural born citizen who has lost his Philippine citizenship and who has
the legal capacity to enter into a contract under Philippine Laws may be
a transferee of a private land up to maximum area of five thousand
(5,000) square meters in the case of urban land or three (3) hectares in
the case of rural land to be used by him for business or other purposes.
In the case of married couples, one of them may avail of the privilege
herein granted: Provided, That If both shall avail of the same, the total
is acquired shall not exceed the maximum herein fixed
 In case the transferee already owns urban or rural land for business
or other purposes, he shall be entitled to be a transferee of additional
urban or rural land for business or other purposes which when added to
those already owned by him shall not exceed the maximum areas
herein authorized.
A transferee under this Act may acquire not more than two (2) lots
which should be situated in different municipalities or cities anywhere
in the Philippines: Provided, That the Total land area thereof shall not
exceed five thousand (5,000) square meters in the case of urban land or
three (3) hectares in the case of rural land for use by him for business
P a g e | 67
or other purposes. A transferee who has already acquired urban land
shall be disqualified form acquiring rural land and vice versa.
 Small and medium-sized domestic market enterprises with paid in

equity capital less than the equivalent of Two hundred thousands US
dollars (US$200,000.00), are reserved to Philippines nationals:
Provided, That if (1) they involve advance technology as determined by
the Department of Science and Technology, or (2) they employ at least
fifty (50) direct employees, then a minimum paid-in capital of One
hundred thousand US dollars (US$100,000.00) shall be allowed to non-
Philippines nationals.
Negative List “A”
 Mass Media except recording, practice of licensed profession, retail

trade, cooperative and small-scale mining, etc. where foreign
ownership is prohibited; Advertising, ownership of land, operation and
management of public utilities, etc., where only minority foreign
ownership is prohibited
Negative List “B”
 Refers to areas that are defense-related, those with adverse effects

on public health and morals and domestic market enterprises with paid-
up capital of less than US$200,000, provided they involved advanced
technology as determined by the Department of Science and
Technology (DOST) or directly employ at least fifty (50) employees, in
which case, the paid-up capital shall be lowered to US$100,000 only to
non-Philippine nationals
Basic Rights of Foreign Investors
 Right to REPATRIATION OF INVESTMENTS
In the case of foreign investments, the right to repatriate the entire

proceeds of the liquidation of the investments in the currency in which
the investment was originally made at the exchange rate prevailing at
the time of repatriation.

 Right to REMITTANCE OF EARNINGS
The right to remit, at the exchange rate prevailing at the time of

remittance, such as may be necessary to meet the payment of interest
and the principal on foreign loans and foreign obligations arising from
technological assistance contracts.

 Right to FREEDOM FROM EXPROPRIATION
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There shall be no expropriation by the government of the property
represented by the investments or of the property of enterprises except
for public use or in the interest of national welfare and defense and
upon payment of just compensation. In such cases, foreign investors or
enterprises shall have the right to remit sums received as compensation
for the expropriated property in the currency in which the investment
was originally made and at the exchange rate prevailing at the time of
remittance.
GENERAL BANKING ACT AND OTHER RELATED LAWS
The banking system has become an indispensable institution in the

modern world and plays a vital role in the economic life of every
civilized society. Whether as mere passive entities for the safe-keeping
and saving of money or as active instruments of business and
commerce, banks have attained an ubiquitous presence among the
people, who have come to regard them with respect and even gratitude
and, above all, trust and confidence. In this connection, it is important
that banks should guard against injury attributable to negligence or
bad faith on its part. As repeatedly emphasized, since the banking
business is impressed with public interest, the trust and confidence of
the public in it is of paramount importance.
SECURITY BANK AND TRUST COMPANY, petitioner, vs.

RIZAL COMMERCIAL BANKING CORPORATION,
respondent. (G.R. No. 170984. January 30, 2009.)
General Banking Laws
General Banking Law (RA 8791)

New Central Bank Act (RA 7653 as amended by RA 11211)
Special Banking Laws
1. Rural Bank Act (RA 7353)

2. Private Development Banks Act (RA 4093)
3. Savings and Loan Association Act (RA 3779)
4. Thrift Banks Act (RA 7906)
Other Laws affecting banks
1. Secrecy of Bank Deposits (RA 1405)

2. Unclaimed Balances Law (Act no.3936)
3. Philippine Deposit Insurance Corporation (RA 3591)
4. Special Purpose Vehicle Act (RA 9182)
5. Anti-Money Laundering Act (RA 9160 as amended by RA 9194)
6. Access Devices and Regulation Act
P a g e | 69
 RA 8791, SECTION 2. Declaration of Policy. — The State

recognizes the vital role of banks in providing an environment
conducive to the sustained development of the national economy and
the fiduciary nature of banking that requires high standards of
integrity and performance. In furtherance thereof, the State shall
promote and maintain a stable and efficient banking and financial
system that is globally competitive, dynamic and responsive to the
demands of a developing economy.
 SECTION 3. Definition and Classification of Banks. —
"Banks" shall refer to entities engaged in the lending of funds obtained

in the form of deposits. (2a)
Nature of Banking Business
 Debtor-Creditor Relationship
 Fiduciary Duty
 Not a trust agreement
 Indispensable Institution
 Impressed with public interest
 Not expected to be infallible
Liability of Banks for Acts of Officers and Employees
 Primary Liability
 Highest Degree of Responsibility
 Respondeat Superior
 Negligence of Manager
 Negligence of Officers
 Negligence of Tellers
 Right to recover from employees
 Liability for Damages
Governance of BSP
 The Monetary Board exercises the powers and functions of the BSP,
such as the conduct of monetary policy and supervision of the financial
system. Its chairman is the BSP Governor, with five full-time members
from the private sector and one member from the Cabinet.
 The Governor is the chief executive officer of the BSP and is

required to direct and supervise the operations and internal
administration of the BSP. A deputy governor heads each of the BSP's
operating sector as follows:
P a g e | 70
Monetary Stability Sector takes charge of the formulation and
implementation of the BSP’s monetary policy, including serving the
banking needs of all banks through accepting deposits, servicing
withdrawals and extending credit through the rediscounting facility.
Supervision and Examination Sector enforces and monitors compliance

to banking laws to promote a sound and healthy banking system.
Resource Management Sector serves the human, financial and physical

resource needs of the BSP
Constitutional Basis: Section 20, Art. XII of 1987 Constitution
Central Monetary Authority that shall function and operate as an

independent and accountable body corporate in the discharge of its
mandated responsibilities concerning money, banking and credit.
Does the BSP have supervision over the operations of and exercise
regulatory powers over quasi-banks, trust entities and other
financial institutions?
The Bangko Sentral shall also have supervision over the operations
of and exercise regulatory powers over quasi-banks, trust entities
and other financial institutions which under special laws are
subject to Bangko Sentral supervision.
For the purposes of this Act, "quasi-banks" shall refer to entities

engaged in the borrowing of funds through the issuance, endorsement
or assignment with recourse or acceptance of deposit substitutes as
defined in Section 95 of Republic Act No. 7653 (hereafter the "New
Central Bank Act”) for purposes of relending or purchasing of
receivables and other obligations.
• The Monetary Board may forbid a bank from doing business and
place it under receivership without prior notice and hearing it the MB
finds that a bank: (a) is unable to pay its liabilities as they become due
in the ordinary course of business; (b) has insufficient realizable assets
to meet liabilities; (c) cannot continue in business without involving
probable losses to its depositors and creditors; and (d) has willfully
violated a cease and desist order of the Monetary Board for acts or
transactions which are considered unsafe and unsound banking
practices and other acts or transactions constituting fraud or dissipation
of the assets of the institution. (Alfeo D. Vivas, vs. Monetary Board
and PDIC, G.R. No. 191424, August 7, 2013)
Policy Directions; Ratios, Ceilings and Limitations

P a g e | 71
SECTION 5. Policy Direction; Ratios, Ceilings and Limitations.

— The Bangko Sentral shall provide policy direction in the areas of
money, banking and credit.
The Monetary Board may prescribe ratios, ceilings, limitations, or

other forms of regulation on the different types of accounts and
practices of banks and quasi-banks which shall, to the extent feasible,
conform to internationally accepted standards, including those of the
Bank for International Settlements (BIS). The Monetary Board may
exempt particular categories of transactions from such ratios, ceilings
and limitations, but not limited to exceptional cases or to enable a bank
or quasi-bank under rehabilitation or during a merger or consolidation
to continue in business with safety to its creditors, depositors and the
general public
 The BSP has the exclusive power and authority to issue the national
currency. BSP’s notes and coins are issued against, and in amounts not
exceeding, the assets of the BSP. All notes and coins issued by the BSP
are fully guaranteed by the government and are considered legal tender
for all private and public debts.
Who bears liability for banks and notes issued?

 SECTION 51. Liability for Notes and Coins. — Notes and coins
issued by the Bangko Sentral shall be liabilities of the Bangko
Sentral and may be issued only against, and in amounts not
exceeding, the assets of the Bangko Sentral. Said notes and coins
shall be a first and paramount lien on all assets of the Bangko Sentral.
The Bangko Sentral's holdings of its own notes and coins shall not be
considered as part of its currency issue and, accordingly, shall not form
part of the assets or liabilities of the Bangko Sentral.
Checks as Legal Tender
 Section 60. Legal Character. – Checks representing demand

deposits do not have legal tender power and their acceptance in the
payment of debts, both public and private, is at the option of the
creditor: Provided, however, That a check which has been cleared and
credited to the account of the creditor shall be equivalent to a delivey to
the creditor of cash in an amount equal to the amount credited to his
account.
Monetary Stabilization
SECTION 61. Guiding Principle. — The Monetary Board shall

endeavor to control any expansion or contraction in monetary
P a g e | 72
aggregates which is prejudicial to the attainment or maintenance of
price stability
The policy may mean two things:
1. Increasing money supply during recession to stimulate spending;

or
2. Restricting it during inflation to curtail spending.
Difference between an Ordinary Corporation and a Banking

Corporation
Point Ordinary Banking

Corporation Corporation
Classificatio May be stock or Must generally be
n non-stock a stock
Stocks May issue par Par value stocks
Issued value or no par only
value
Registration May be registered Requires
without any certificate of
certificate of authority from
authority issued Monetary Board
by another govt
agency
Acquisition May May not
of Shares purchase/acquire purchase/aqcuire
its own shares for its shares or
a legitimate accept them as
corporate security for a
purpose, provided loan. Except when
it has unrestricted authorized by the
retained earnings Monetary Board
Number of 5-15 5-15. In case of
Directors merger or
consolidation,
P a g e | 73
number of
directors shall not
exceed 21
Declaration May declare Conditional,
of subject to section
Dividends 57 of GBL (RA
8791)
Classification of Banks
Type of Power Authority

Bank
Commercial In addition to 1. Invest in the equities
Bank the general of allied enterprises as
powers may be determined by
incident to the Monetary Board;
corporations 2. purchase, hold and
and those convey real estate as
provided in specified under
other laws, a Sections 51 and 52 of
KB shall have R.A. No. 8791;
the authority 3. receive in custody
to exercise all funds, documents and
such powers valuable objects;
as may be 4. act as financial agent
necessary to and buy and sell, by
carry on the order of and for the
business of account of their
commercial customers, shares,
banking, such evidences of
as accepting indebtedness and all
drafts and types of securities;
issuing letters 5. make collections and
of credit; payments for the
discounting account of others and
and perform such other
negotiating services for their
P a g e | 74
promissory customers as are not
notes, drafts, incompatible with
bills of banking business;
exchange, and 6. upon prior approval of
other the Monetary Board,
evidences of act as managing agent,
debt; adviser, consultant or
accepting or administrator of
creating investment
demand management/advisory/
deposits; -consultancy
receiving accounts;
other types of 7. out safety deposit
deposits and boxes; and
deposit 8. engage in quasi-
substitutes; banking functions.
buying and
selling foreign
exchange and
gold or silver
bullion;
acquiring
marketable
bonds and
other debt
securities; and
extending
credit, subject
to such rules
as the
Monetary
Board may
promulgate.
These rules
may include
the
determination
of bonds and
other debt
securities
eligible for
investment,
the maturities
and aggregate
amount of
such
investment.
Type Power Authority

of
Ban
k
Thrif 1. grant loans, whether 1. open current or
P a g e | 75
t secured or checking accounts;
Bank unsecured; 2. engage in trust, quasi-
2. invest in readily banking functions and
marketable bonds and money market
other debt securities, operations;
commercial papers 3. act as collection agent
and accounts for government
receivable, drafts, entities, including but
bills of exchange, not limited to, the
acceptances or notes Bureau of Internal
arising out of Revenue (BIR),
commercial Social Security
transactions; System (SSS) and the
3. issue domestic letters Bureau of Customs
of credit; (BOC);
4. extend credit 4. act as official
facilities to private depository of national
and government agencies and of
employees; municipal, city or
5. extend credit against provincial funds in
the security of the municipality, city
jewelry, precious or province where the
stones and articles of TB is located;
similar nature, subject 5. issue mortgage and
to such rules and chattel mortgage
regulations as the certificates, buy and
Monetary Board may sell them for its own
prescribe; account or for the
6. accept savings and account of others, or
time deposits; accept and receive
7. rediscount paper with them in payment or as
the Land Bank of the amortization of its
Philippines, (LBP), loan; and
Development Bank of 6. to invest in the equity
the Philippines of allied
(DBP), and other undertakings.
government-owned or
controlled RBs. In addition to
corporations; the powers provided
8. accept foreign in other laws, an RB
currency deposits as may perform any or
provided under R.A. all of the following
No. 6426, as services:
amended;
9. act as correspondent 1. extend loans and
for other financial advances primarily
institutions; for the purpose of
10. purchase, hold and meeting the normal
convey real estate as credit needs of
specified under farmers, fishermen or
Sections 51 and 52 of farm families as well
R.A. No. 8791; and as cooperatives,
11. offer other banking merchants, private
services as provided and public
in Section 53 of R.A. employees;
No. 8791. 2. accept savings and
P a g e | 76
time deposits;
3. act as correspondent
of other financial
institutions;
4. rediscount paper with
the LBP, DBP or any
other bank, including
its branches and
agencies. Said banks
shall specify the
nature of paper
deemed acceptable
for rediscount, as well
as the rediscount rate
to be charged by any
of these banks;
5. Act as collection
agent; and
6. Offer other banking
services as provided
in Section 53 of R.A.
No. 8791.
Rural Banks
1. accept current or checking accounts: Provided, that such RB has net

assets of at least P5 million; accept savings and time deposits;
2. act as trustee over estates or properties of farmers and merchants;
3. act as official depository of municipal, city or provincial funds in the
municipality, city or province where it is located;
4. sell domestic drafts; and
5. invest in allied undertakings.
Cooperative Banks
A Coop Bank shall be organized primarily to provide financial and

credit services to cooperatives and may perform any or all of the
services offered by RBs.
Universal Banks
1. Licensed by the BSP to do both commercial and investment

bankingAuthority to exercise:
2.Powers authorized for a commercial bank
3.Powers of an investment house as provided in existing laws
4.Power to invest in non-allied enterprises
P a g e | 77
Difference between a Universal Bank (UB) and a Commercial

Bank (KB)
UB KB
Has additional power other No such power. Only such
than those authorized for powers as are necessary to
commercial banks, carry on the business of
including the power of an banking.
investment house and the
power to invest in non-
allied enterprises
May invest in equities of May only invest in equities
allied, whether financial or of allied enterprises,
non-financial and non- whether financial or non-
allied enterprises. financial
Highest capitalization Second highest minimum
requirement capital requirement (P2.4
(P4.9 B) B)
Organization of Banks
 Capabilities
Asessment of the following : ownership structure; directors and senior

management; operating plan, internal controls; and the projected
financial condition and capital base.
Type of Bank Capital Requirements

Universal Bank P4. 9 B
Commercial Bank P2.4 B
Thrift Bank P 1.0 B
• head office within MM P 500.0 M
• head office outside MM P250.0 M
(in Cebu and Davao)
• head office outside MM
(other areas)
P a g e | 78
Rural Bank P 100.0 M
• Within MM P 50.0 M
• Cities of Cebu and P 10.0 M
Davao P 5.0 M
• 1st, 2nd, 3rd class cities P 5.0 M
and 1st class municipalities
• 4th, 5th and 6th class
cities and in 2nd, 3rd, and
4th municipalities
• 5th and 6th class
municipalities
Type of Bank Capital Requirement
Cooperative Banks P10.0 M
Islamic Bank P 1.0 B
Rules:
1. Foreign individuals and non-bank corporations may own up to 40%

of the voting stocks of a domestic bank. Provided, that aggregate
foreign voting stocks owned by them shall not exceed 40% of the
outstanding voting stock.
2. A Filipino individual and a domestic non-bank corporation may
each own up to 40% of the voting stock of a domestic bank. No rule on
aggregate ceiling.
 Foreign stockholdings (Grandfather Rule)
- In case of an individual, percentage of foreign owned voting stocks

shall be determined by citizenship of the individual stockholders in
that bank.
- In case of corporations, citizenship of corporation shall follow

citizenship of the controlling Stockholders, irrespective of the place of
incorporation. Controlling stockholders mean those who hold more
than 50% of the voting stock.
 Commercial Banks – 60% owned by Filipino citizens

 Thrift Banks – 40% at least owned by Filipino citizens
 Rural Banks – wholly owned by Filipinos
 Family Groups or related interests (sections 12 and 13, GBL)
Stockholdings of individuals related to each other within the 4th degree

of consanguinity or affinity, legitimate or common law shall be
considered family groups or related interests. Must be fully disclosed in
all transactions.
P a g e | 79
2 or more corporations owned or controlled by the same family group
or group of persons shall be considered related interests. Must be fully
disclosed.
 There is no limit on the number of shares that can be owned by the

same family or related interest without prejudice to the 40% restriction
on nationality.
Fit and Proper Rule
Monetary Board to issue rules and regulations to determine

qualifications and disqualifications of bank directors or officers and
disqualify those unfit.
Factors to consider – integrity, experience, education, training and

competence.
Rules on disqualification
What happens when borrower submits false statements to bank?
 Bank may terminate the loan
 Demand immediate repayment or liquidation of the obligation
Article 1198, Civil Code of the Philippines (Debtor loses the right to
make use of the period)
The bank invests the money that it holds in trust of its depositors. For
this reason, we have held that the business of a bank is one affected
with public interest, for which reason the bank should guard against
loss due to negligence or bad faith. In approving the loan of an
applicant, the bank concerns itself with proper information regarding
its debtors. The petitioner, as a bank and a financial institution engaged
in the grant of loans, is expected to ascertain and verify the identities of
the persons it transacts business with.
UNITED COCONUT PLANTERS BANK, petitioner, vs.

TEOFILO C. RAMOS, respondent. (G.R. No. 147800. November
11, 2003)
The business of a bank is one affected with public interest, for which
reason the bank should guard against loss due to negligence or bad
faith. In approving the loan of an applicant, the bank concerns itself
P a g e | 80
with proper [information] regarding its debtors." Any investigation
previously conducted on the property offered by petitioners as
collateral did not preclude PNB from considering new information on
the same property as security for a subsequent loan.
[G.R. No. 161319. January 23, 2007.] SPS. EDGAR AND DINAH
OMENGAN, petitioners, vs. PHILIPPINE NATIONAL BANK, HENRY
M. MONTALVO AND MANUEL S. ACIERTO, * respondents.
Rule on setting interest rates
While the Court recognizes the right of the parties to enter into
contracts and who are expected to comply with their terms and
obligations, this rule is not absolute. Stipulated interest rates are
illegal if they are unconscionable and the Court is allowed to temper
interest rates when necessary. In exercising this vested power to
determine what is iniquitous and unconscionable, the Court must
consider the circumstances of each case. What may be iniquitous and
unconscionable in one case, may be just in another. In a number of
cases, this Court equitably reduced the interest rate agreed upon by the
parties for being iniquitous, unconscionable, and/or exorbitant.
TRADE & INVESTMENT DEVELOPMENT CORPORATION OF

THE PHILIPPINES (Formerly Philippine Export & Foreign Loan
Guarantee Corporation, petitioner, vs. ROBLETT INDUSTRIAL
CONSTRUCTION CORPORATION, ROBERTO G. ABIERA and
LETICIA ABIERA, and PARAMOUNT INSURANCE
CORPORATION, respondents. (G.R. No. 139290. May 19, 2006.)
Escalation clauses are not void per se. However, one "which grants the
creditor an unbridled right to adjust the interest independently and
upwardly, completely depriving the debtor of the right to assent to an
important modification in the agreement" is void. Clauses of that nature
violate the principle of mutuality of contracts. Article 1308 of the Civil
Code holds that a contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.
For this reason, we have consistently held that a valid escalation clause
provides:
1. That the rate of interest will only be increased if the applicable

maximum rate of interest is increased by law or by the Monetary
Board; and
2. That the stipulated rate of interest will be reduced if the applicable

maximum rate of interest is reduced by law or by the Monetary Board
(de-escalation clause).
P a g e | 81
EQUITABLE PCI BANK, AIMEE YU and BEJAN LIONEL
APAS, petitioners, vs. NG SHEUNG NGOR ** doing business
under the name and style "KEN MARKETING," KEN
APPLIANCE DIVISION, INC. and BENJAMIN E. GO,
respondents. (G.R. No. 171545. December 19, 2007.)
Restrictions on Bank Exposure to Directors, Officers, Stockholders

and their Related Interests (DOSRI)
 SECTION 36. Restriction on Bank Exposure to Directors, Officers,

Stockholders and Their Related Interests. — No director or officer of
any bank shall, directly or indirectly, for himself or as the
representative or agent of others, borrow from such bank nor shall he
become a guarantor, indorser or surety for loans from such bank to
others, or in any manner be an obligor or incur any contractual liability
to the bank except with the written approval of the majority of all the
directors of the bank, excluding the director concerned: Provided, That
such written approval shall not be required for loans, other credit
accommodations and advances granted to officers under a fringe
benefit plan approved by the Bangko Sentral. The required approval
shall be entered upon the records of the bank and a copy of such entry
shall be transmitted forthwith to the appropriate supervising and
examining department of the Bangko Sentral.
Dealings of a bank with any of its directors, officers or stockholders

and their related interests shall be upon terms not less favorable to the
bank than those offered to others.
After due notice to the board of directors of the bank, the office of any
bank director or officer who violates the provisions of this Section may
be declared vacant and the director or officer shall be subject to the
penal provisions of the New Central Bank Act.
The Monetary Board may regulate the amount of loans, credit

accommodations and guarantees that may be extended, directly or
indirectly, by a bank to its directors, officers, stockholders and their
related interests, as well as investments of such bank in enterprises
owned or controlled by said directors, officers, stockholders and their
related interests. However, the outstanding loans, credit
accommodations and guarantees which a bank may extend to each of
its stockholders, directors, or officers and their related interests, shall
be limited to an amount equivalent to their respective unencumbered
deposits and book value of their paid-in capital contribution in the
bank: Provided, however, That loans, credit accommodations and
guarantees secured by assets considered as non-risk by the Monetary
Board shall be excluded from such limit: Provided, further, That loans,
credit accommodations and advances to officers in the form of fringe
P a g e | 82
benefits granted in accordance with rules as may be prescribed by the
Monetary Board shall not be subject to the individual limit.
Banks were not created for the benefit of their directors and officers;
they cannot use the assets of the bank for their own benefit, except as
may be permitted by law. Congress has thus deemed it essential to
impose restrictions on borrowings by bank directors and officers in
order to protect the public, especially the depositors. Hence, when the
law prohibits directors and officers of banking institutions from
becoming in any manner an obligor of the bank (unless with the
approval of the board), the terms of the prohibition shall be the
standards to be applied to directors' transactions such as those involved
in the present case. (JOSE C. GO, petitioner, vs. BANGKO
SENTRAL NG PILIPINAS, respondent. (G.R. No. 178429. October
23, 2009.)
Prohibited Transactions of Banks
1. Prohibited to act as insurer

2. Conducting business in an unsafe or unsound manner
3. Prohibition on Dividend Declaration
4. Unauthorized advertisement or business representation
Prohibited acts of borrower
 Fraudulently over valuing any property for credit facility

 Furnishing false or make misrepresentations
 Attempt to defraud a bank
 Offering any director, officer or employee any gift, fee or
commission
Conservatorship in Banks
FIRST PHILIPPINE INTERNATIONAL BANK (Formerly

Producers Bank of the Philippines) and MERCURIO RIVERA,
petitioners, vs. COURT OF APPEALS, CARLOS EJERCITO, in
substitution of DEMETRIO DEMETRIA, and JOSE JANOLO,
respondents. (G.R. No. 115849. January 24, 1996.)
Hence, the conservator merely takes the place of a bank's board of

directors. What the said board cannot do — such as repudiating a
contract validly entered into under the doctrine of implied
authority — the conservator cannot do either. Ineluctably, his power
is not unilateral and he cannot simply repudiate valid obligations of the
Bank. His authority would be only to bring court actions to assail such
contracts — as he has already done so in the instant case. A contrary
understanding of the law would simply not be permitted by the
P a g e | 83
Constitution. Neither by common sense. To rule otherwise would be to
enable a failing bank to become solvent, at the expense of third parties,
by simply getting the conservator to unilaterally revoke all previous
dealings which had one way or another come to be considered
unfavorable to the Bank, yielding nothing to perfected contractual
rights nor vested interests of the third parties who had dealt with the
Bank.
WHEN BANK IS UNDER RECEIVERSHIP / LIQUIDATION
Upon report of the head of the supervising or examining department,

the Monetary Board finds that a bank or quasi-bank:
1. Has notified the BSP or publicly announced a closure, or has

been dormant for at least 60 days or in any manner has
suspended the payment of its deposit/deposit substitute
liabilities, or is unable to pay their liabilities as they become due
in the ordinary course of business. PROVIDED, this shall not
include inability to pay caused by extraordinary demands
induced by financial panic in the banking community;
2. Has insufficient realizable assets as determined by the BSP to

meet its liabilities;
3. Cannot continue its business without involving probable losses

to its depositors or creditors
4. Has wilfully violated a cease and desist order under section 37 of
the act that has become final, involving acts or transactions
which amount to fraud or dissipation of the assets if the
institution, in which case the MB may summarily and without
need of prior hearing forbid the institution from doing business
in the Philippines and designate the PDIC as receiver and direct
the PDIC to proceed with liquidation of the closed bank pursuant
to RA 3591. The MB shall notify in writing, through the
receiver, the board of directors of the closed bank of its decision.
ACTIONS BY THE MONETARY BOARD
The actions of the Monetary Board taken under this section or under
section 29 shall be final and executory, and may not be restrained or set
aside by the court except on petition for certiorari on the ground that
the action taken was in excess of jurisdiction or with grave abuse of
discretion as to amount to lack or excess of jurisdiction. The petition
for certiorari may only be filed by the stockholders of record
representing the majority of the capital stock within 10 days from
P a g e | 84
receipt by the board of directors of the institution of the order directing
receivership, liquidation or conservatorship. The designation of a
conservator under section 29 of this Act or the appointment of a
receiver under this section shall be vested exclusively with the
Monetary Board. Furthermore, the designation of a conservator is not a
precondition to the designation of a receiver.
 The receiver or liquidator meanwhile acts not only for the benefit of the
bank, but for its creditors as well.
 In Provident Savings Bank vs. Court of Appeals, we further stated that:

When a bank is prohibited from continuing to do business by the
Central Bank and a receiver is appointed for such bank, that bank
would not be able to do new business, i.e., to grant new loans or to
accept new deposits. However, the receiver of the bank is in fact
obliged to collect debts owing to the bank, which debts form part of the
assets of the bank. The receiver must assemble the assets and pay the
obligation of the bank under receivership and take steps to prevent
dissipation of such assets. Accordingly, the receiver of the bank is
obliged to collect pre-existing debts due to the bank, and in connection
therewith, to foreclose mortgages securing such debts.
SPS. CESAR A. LARROBIS, JR. and VIRGINIA S. LARROBIS,

petitioners, vs. PHILIPPINE VETERANS BANK, respondent.
(G.R. No. 135706. October 1, 2004.)
 The appointment of a receiver operates to suspend the authority of the

bank and of its directors and officers over its property and effects, such
authority being reposed in the receiver, and in this respect, the
receivership is equivalent to an injunction to restrain the bank officers
from intermeddling with the property of the bank in any way. (65 Am.
Jur. 2d Receivers, §146 [1963]. In a nutshell, the insolvency of a bank
and the consequent appointment of a receiver restrict the bank's
capacity to act, especially in relation to its property.
MIGUELA R. VILLANUEVA, RICHARD R. VILLANUEVA, and

MERCEDITA VILLANUEVA-TIRADOS, petitioners, vs. COURT
OF APPEALS, CENTRAL BANK OF THE PHILIPPINES,
ILDEFONSO C. ONG, and PHILIPPINE VETERANS BANK,
respondents. (G.R. No. 114870. May 26, 1995.)
 The Monetary Board may summarily and without need for prior
hearing forbid the institution from doing business in the Philippines
P a g e | 85
and designate the Philippine Deposit Insurance Corporation as receiver
of the banking institution.
 For a quasi-bank, any person of recognized competence in banking or

finance may be designed as receiver. (Section 30, NCBA)
 "The designation of a conservator under Section 29 of this Act or the

appointment of a receiver under this section shall be vested exclusively
with the Monetary Board. Furthermore, the designation of a
conservator is not a precondition to the designation of a receiver."
*Congress itself has recognized that a bank receiver only has powers
of administration. Section 30 of the New Central Bank Act expressly
provides that "[t]he receiver shall immediately gather and take charge
of all the assets and liabilities of the institution, administer the same for
the benefit of its creditors, and exercise the general powers of a
receiver under the Revised Rules of Court but shall not, with the
exception of administrative expenditures, pay or commit any act that
will involve the transfer or disposition of any asset of the
institution . . .“
ABACUS REAL ESTATE DEVELOPMENT CENTER, INC.,
petitioner, vs. THE MANILA BANKING CORPORATION,
respondent. (G.R. No. 162270. April 6, 2005.)
 The receiver shall determine as soon as possible, but not later than
ninety (90) days from take over, whether the institution may be
rehabilitated or otherwise placed in such a condition so that it may be
permitted to resume business with safety to its depositors and creditors
and the general public: Provided, that any determination for the
resumption of business of the institution shall be subject to prior
approval of the Monetary Board. (section 30, NCBA)
DEPOSIT INSURANCE (RA 3591)
ROLE OF THE PDIC
1. Insure the deposits of all banks which are entitled to the benefits of
insurance and which shall have all the powers granted by law
2. It shall serve as a basic policy, promote and safeguard the interests

of the depositing public by way of providing permanent and
continuing insurance coverage on all insured deposits
 The Philippine Deposit Insurance Corporation (PDIC) was created by

law and, as such, is governed primarily by the provisions of the special
law creating it. The liability of the PDIC for insured deposits
P a g e | 86
therefore is statutory and, under Republic Act No. 3591, as
amended, such liability rests upon the existence of deposits with the
insured bank, not on the negotiability or non-negotiability of the
certificates evidencing these deposits.
 The authority for this conclusion finds support in decisions by
American state courts applying their respective bank guaranty laws.
The fact that the certificates state that the certificates are insured by
PDIC does not ipso facto make the latter liable for the same should the
contingency insured against arise. As stated earlier, the deposit liability
of PDIC is determined by the provisions of R.A. No. 3591, and
statements in the certificates that the same are insured by PDIC are not
binding upon the latter.
PHILIPPINE DEPOSIT INSURANCE CORPORATION,
petitioner, vs. COURT OF APPEALS, ROSA AQUERO,
GERARD YU, ERIC YU, MINA YU, ELIZABETH NGKAION,
MERLY CUESCANO, LETICIA TAN, FELY RUMBANA,
LORNA ACUB, represented by their Attorney-in-Fact, JOHN
FRANCIS COTAOCO, respondents. [G.R. No. 118917. December
22, 1997.]
 In order that a claim for deposit insurance with the PDIC may prosper,
the law requires that a corresponding deposit be placed in the insured
bank.
 Personal Filing of claims is required by the PDIC
 Maximum Deposit Insurance for each depositor is P500,000.00,

regardless of the number of accounts the depositor has in the closed
bank.
INSURED DEPOSIT
 The term ‘insured deposit’ means the amount due to any bona fide
depositor for legitimate deposits in an insured bank net of any
obligation of the depositor to the insured bank as of date of closure, but
not to exceed P500,000.00.
 A joint account shall be insured separately from any individually-

owned deposit account.
 R.A. No. 9576 stipulates that PDIC will not pay deposit insurance for
the following accounts or transactions:
1.Investment products such as bonds, securities and trust accounts;

2. Deposit accounts which are unfunded, fictitious or fraudulent;
P a g e | 87
3. Deposit products constituting or emanating from unsafe and unsound
banking practices;
4. Deposits that are determined to be proceeds of an unlawful lactivity
as defined under the Anti-Money Laundering Law.
SPLITTING OF DEPOSITS
Deposits in different banking institutions are insured separately.

However, if a bank has one or more branches, the main office and all
branch offices are considered as one bank. Thus, if you have deposits at
the main office and at one or more branch offices of the same bank, the
deposits are added together when determining deposit insurance
coverage, the total of which shall not exceed P500,000.
ANTI- MONEY LAUNDERING ACT (RA 9160)
Money Laundering is a crime whereby the proceeds of an unlawful

activity as defined in the Anti- Money Laundering Act are transacted or
attempted to be transacted to make them appear to have originated from
legitimate sources.
 Unlawful Activity is the offense which generates dirty money. It is

commonly called the predicate crime. It refers to any act or omission or
series or combination thereof involving or having direct relation to the
following:
Predicate Crimes/Unlawful Activity
 Kidnapping for ransom

 Drug trafficking and related offenses
 Graft and corrupt practices
 Plunder
 Robbery and Extortion
 Jueteng and Masiao
 Piracy
 Qualified theft
 Swindling
 Smuggling
 Violations under the Electronic Commerce Act of 2000
 Hijacking; destructive arson; and murder, including those
perpetrated by terrorists against non-combatant persons and similar
targets
P a g e | 88
 Fraudulent practices and other violations under the Securities
Regulation Code of 2000
 Felonies or offenses of a similar nature that are punishable under the
penal laws of other countries.
Money Laundering Offenses and Penalties
 Knowingly transacting or attempting to transact any monetary

instrument/property which represents, involves or relates to the
proceeds of an unlawful activity.
 Penalty is 7 to 14 years imprisonment and a fine of not less than

P3M but not more than twice the value of the monetary
instrument/property.
 Knowingly performing or failing to perform an act in relation to

any monetary instrument/property involving the proceeds of any
unlawful activity as a result of which he facilitated the offense of
money laundering. Penalty is 4 to 7 years imprisonment and a fine of
not less than P1.5M but not more than P3M.
 Knowingly failing to disclose and file with the AMLC any

monetary instrument/property required to be disclosed and filed.
Penalty is 6 months to 4 years imprisonment or a fine of not less than
P100,000 but not more than P500,000, or both.
Covered Institutions are those mandated by the AMLA to submit

covered and suspicious transaction reports to the AMLC. These are:
1. Banks and all other entities, including their subsidiaries and

affiliates, supervised and regulated by the Bangko Sentral ng
Pilipinas
2. Insurance companies and all other institutions supervised or
regulated by the Insurance Commission
3. Securities dealers, pre-need companies, foreign exchange
corporations and other entities supervised or regulated by the Securities
and Exchange Commission
Covered transactions are single transactions in cash or other equivalent

monetary instrument involving a total amount in excess of Five
Hundred Thousand (P500,000) Pesos within one (1) banking day
Suspicious transactions are transactions with covered institutions,

regardless of the amounts involved, where any of the following
circumstances exists:
1. there is no underlying legal/trade obligation, purpose or economic

justification;
P a g e | 89
2. the client is not properly identified;
3. the amount involved is not commensurate with the business or
financial capacity of the client;
4. the transaction is structured to avoid being the subject of reporting
requirements under the AMLA;
5. there is a deviation from the client’s profile/past transactions;
6. the transaction is related to an unlawful activity/offense under the
AMLA; and
7. transactions similar or analogous to the above
Provisional Remedies
1. Freezing of Monetary Instruments or Property under Section 10

2. Authority to inquire into Bank Deposits under Section 11
 The Court of Appeals, upon application ex parte (without notice to

the other party) by the AMLC and after determination that probable
cause exists that any monetary instrument or property is in any way
related to an unlawful activity, may issue a freeze order which shall be
effective immediately. The freeze order shall be for a period of 20 days
unless extended by the court
 Freezing of Monetary Instruments or Property under Section 10 –

Involves physical seizure of the assets
 Authority to inquire into Bank Deposits under Section 11 – does not
involve physical seizure of the assets
Authority to inquire into bank deposits
 Not a search warrant

 Right to notice and right to be heard
Related Web of Accounts
 Provisional remedy on freeze of accounts covers as well related web

of accounts.
 Related web of accounts is defined as those accounts, the funds and
sources of which originated from and/or materially linked to the
monetary instrument (s) or properties subject of the freeze order.
Mutual Assistance among States
1. Request for assistance from a foreign state, based on the principles

of mutuality and reciprocity.
2. AMLC may also obtain assistance from a foreign state
Prohibitions on Anti-Money Laundering Law

P a g e | 90
1. Shall not be used for political persecution or harassment;
2. Shall not be used as an instrument to hamper competition in trade
and commerce;
3. No case for money laundering may be filed to the prejudice of a
candidate for an electoral office during an election period
 Restitution for any aggrieved party shall be governed by the

provisions of the Civil Code.
 No person may be prosecuted under the penal provisions of the

AMLA for acts committed prior to the enactment of the law on 17
October 2001.
 When there is a suspicious transaction report or a covered

transaction report deemed suspicious after investigation by the AMLC
and the court has, in a petition filed for the purpose, ordered the seizure
of any monetary instrument or propert, in whole or in part, directly or
indirectly, related to said report, the Revised Rules on Court on
forfeiture shall apply.
The primary objective of a freeze order is to temporarily preserve

monetary instruments or property that are in any way related to an
unlawful activity or money laundering, by preventing the owner from
utilizing them during the duration of the freeze order. The effectivity of
the freeze order was limited to a period not exceeding six months,
which may be extended by the CA should it become completely
necessary. Nonetheless, when the Republic has not offered any
explanation why it took six years before a civil forfeiture case was filed
in court, it can only be concluded that the continued extension of the
freeze order beyond the six-month period violated the party’s right to
due process. (Ret. Lt. Gen. Jacinto Ligot, et. al. vs. Republic of the
Philippines, G.R. No. 176944, March 6, 2013)
SECRECY OF BANK DEPOSITS AND FOREIGN CURRENCY

DEPOSITS LAW
On the one hand, Republic Act No. 1405 provides for four (4)
exceptions when records of deposits may be disclosed. These are under
any of the following instances: a) upon written permission of the
depositor, (b) in cases of impeachment, (c) upon order of a competent
court in the case of bribery or dereliction of duty of public officials or,
(d) when the money deposited or invested is the subject matter of the
litigation, and e) in cases of violation of the Anti-Money Laundering
Act (AMLA), the Anti-Money Laundering Council (AMLC) may
inquire into a bank account upon order of any competent court. On the
other hand, the lone exception to the non-disclosure of foreign currency
P a g e | 91
deposits, under Republic Act No. 6426, is disclosure upon the written
permission of the depositor.
These two laws both support the confidentiality of bank deposits. There
is no conflict between them. Republic Act No. 1405 was enacted for
the purpose of giving encouragement to the people to deposit their
money in banking institutions and to discourage private hoarding so
that the same may be properly utilized by banks in authorized loans to
assist in the economic development of the country. It covers all bank
deposits in the Philippines and no distinction was made between
domestic and foreign deposits. Thus, Republic Act No. 1405 is
considered a law of general application. On the other hand, Republic
Act No. 6426 was intended to encourage deposits from foreign lenders
and investors. It is a special law designed especially for foreign
currency deposits in the Philippines. A general law does not nullify a
specific or special law. Generalia specialibus non derogant. Therefore,
it is beyond cavil that Republic Act No. 6426 applies in this case.
P a g e | 92
INTELLECTUAL PROPERTY LAW
 Intellectual property rights" have furthermore been defined under

Section 4 of the Code to consist of: a) Copyright and Related Rights; b)
Trademarks and Service Marks; c) Geographic Indications; d)
Industrial Designs; e) Patents; f) Layout-Designs (Topographies) of
Integrated Circuits; and g) Protection of Undisclosed Information.
(Coca-Cola Bottlers, Phils., Inc. vs. Quintin J. Gomez, et al., G.R. No.
154491, November 14, 2008)
Patents Trade Marks Copyrights

Grant issued by A tool used that Copyright is the
the government differentiates legal protection
through the goods and services extended to the
Intellectual from each other. It owner of the
Property Office is a very important rights in an
of the marketing tool that original work.
Philippines (IP makes the public
Philippines). It identify goods and “Original work”
is an exclusive services. A refers to every
right granted trademark can be production in
for a product, one word, a group the literary,
process or an of words, sign, scientific and
improvement of symbol, logo, or a artistic domain.
a product or combination of any Among the
process which of these. Generally, literary and
is new, a trademark refers artistic works
inventive and to both trademark enumerated in
useful. This and service mark, the IP Code
exclusive right although a service includes books
gives the mark is used to and other
inventor the identify those writings,
right to exclude marks used for musical works,
others from services only. films, paintings
making, using, and other
or selling the works, and
product of his computer
invention programs.
during the life
of the patent.
P a g e | 93
Patents Trade Copyrights

Marks
A patent has a In the The term of
term of Philippines, a protection of
protection of trademark copyright for
twenty (20) can be original and
years providing protected derivative
an inventor through works is the
significant registration. life of the
commercial Registration author plus
gain. In return, gives the fifty (50)
the patent trademark years after
owner must owner the his death.
share the full exclusive The Code
description of right to use specifies the
the invention. the mark and terms of
This to prevent protection for
information is others from the different
made available using the types of
to the public in same or works.
the form of the similar marks
Intellectual on identical
Property or related
Official Gazette goods and
and can be services.
utilized as basis
for future The
research and trademark
will in turn protection
promote granted by IP
innovation and Philippines
development. protects your
mark only in
the
Philippines.
If you want
your mark
protected
outside the
country, you
will need to
file
applications
in the
countries
where you
want your
mark
registered.
P a g e | 94
Patentable Inventions (Sec.21)
 A Technical Solution to a Problem In any field of human activity;

 It must be NEW (“novelty’)
 It must involve an INVENTIVE STEP
 It must be INDUSTRIALLY APPLICABLE
Statutory Classes of Invention
 A useful machine
 A product or composition
 A method or process, or
 An improvement of any of the foregoing
 Microorganism
 Non-biological & microbiological process
Requirements for Patentability
1. NOVELTY
2. INVENTIVE STEP
3. INDUSTRIAL APPLICABILITY
Novelty. - An invention shall not be considered new if it forms part of a

prior art. (Sec. 9, R.A. No. 165a)
 The element of novelty is an essential requisite of the patentability

of an invention or discovery. If a device or process has been known or
used by others prior to its invention or discovery by the applicant, an
application for a patent therefor should be denied; and if the application
has been granted, the court, in a judicial proceeding in which the
validity of the patent is drawn in question, will hold it void and
ineffective. It has been repeatedly held that an invention must possess
the essential elements of novelty, originality and precedence, and for
the patentee to be entitled to the protection the invention must be new
to the world. (Angelita Manzano vs. Court of Appeals, et al., G.R. No.
113388, September 5, 1997)
Prior Art. - Prior art shall consist of:

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1. Everything which has been made available to the public
anywhere in the world, before the filing date or the priority
date of the application claiming the invention; and
2. The whole contents of an application for a patent, utility

model, or industrial design registration, published in
accordance with this Act, filed or effective in the Philippines,
with a filing or priority date that is earlier than the filing or
priority date of the application: Provided, That the
application which has validly claimed the filing date of an
earlier application under Section 31 of this Act, shall be prior
art with effect as of the filing date of such earlier application:
Provided further, That the applicant or the inventor identified
in both applications are not one and the same. (Sec. 9, R.A.
No. 165a)
Novelty and utility are likewise questions of fact. The validity of

patent is decided on the basis of factual inquiries. Whether evidence
presented comes within the scope of prior art is a factual issue to be
resolved by the Patent Office. There is question of fact when the doubt
or difference arises as to the truth or falsehood of alleged facts or when
the query necessarily invites calibration of the whole evidence
considering mainly the credibility of witnesses, existence and relevance
of specific surrounding circumstances, their relation to each other and
to the whole and the probabilities of the situation. (Angelita Manzano
vs. Court of Appeals, et al., G.R. No. 113388, September 5, 1997)
"Priority date" means the date of filing of the foreign application for the
same invention referred to in Section 31 of this Act. (n)
Non-Patentable Inventions
Non-Patentable Inventions. - The following shall be excluded from

patent protection:
22.1. Discoveries, scientific theories and mathematical methods;
22.2. Schemes, rules and methods of performing mental acts, playing

games or doing business, and programs for computers;
22.3. Methods for treatment of the human or animal body by surgery or

therapy and diagnostic methods practiced on the human or animal
P a g e | 96
body. This provision shall not apply to products and composition for
use in any of these methods;
22.4. Plant varieties or animal breeds or essentially biological process

for the production of plants or animals. This provision shall not apply
to micro-organisms and non-biological and microbiological processes.
Provisions under this subsection shall not preclude Congress to

consider the enactment of a law providing sui generis protection of
plant varieties and animal breeds and a system of community
intellectual rights protection:
22.5. Aesthetic creations; and
22.6. Anything which is contrary to public order or morality. (Sec. 8,

R.A. No. 165a)
OWNERSHIP OF PATENT
 Section 29. First to File Rule. - If two (2) or more persons have
made the invention separately and independently of each other, the
right to the patent shall belong to the person who filed an application
for such invention, or where two or more applications are filed for the
same invention, to the applicant who has the earliest filing date or, the
earliest priority date. (3rd sentence, Sec. 10, R.A. No. 165a.)
 Section 30. Inventions Created Pursuant to a Commission. - 30.1.

The person who commissions the work shall own the patent, unless
otherwise provided in the contract.
xxx
P a g e | 97
30.2. In case the employee made the invention in the course of his
employment contract, the patent shall belong to:
(a) The employee, if the inventive activity is not a part of his regular
duties even if the employee uses the time, facilities and materials of the
employer.
(b) The employer, if the invention is the result of the performance of

his regularly-assigned duties, unless there is an agreement, express or
implied, to the contrary. (n)
 Section 31. Right of Priority. - An application for patent filed by

any person who has previously applied for the same invention in
another country which by treaty, convention, or law affords similar
privileges to Filipino citizens, shall be considered as filed as of the date
of filing the foreign application: Provided, That: (a) the local
application expressly claims priority; (b) it is filed within twelve (12)
months from the date the earliest foreign application was filed; and (c)
a certified copy of the foreign application together with an English
translation is filed within six (6) months from the date of filing in the
Philippines. (Sec. 15, R.A. No. 165a)
GROUNDS FOR CANCELLATION
 Section 61. Cancellation of Patents.
61.1. Any interested person may, upon payment of the required fee,
petition to cancel the patent or any claim thereof, or parts of the claim,
on any of the following grounds:
(a) That what is claimed as the invention is not new or Patentable;
(b) That the patent does not disclose the invention in a manner
sufficiently clear and complete for it to be carried out by any person
skilled in the art; or;
(c) That the patent is contrary to public order or morality.

P a g e | 98
61.2. Where the grounds for cancellation relate to some of the claims or
parts of the claim, cancellation may be effected to such extent only.
(Secs. 28 and 29, R.A. No. 165a)
Section 65. Cancellation of the Patent. - 65.1. If the Committee finds

that a case for cancellation has been proved, it shall order the patent or
any specified claim or claims thereof cancelled.
65.2. If the Committee finds that, taking into consideration the

amendment made by the patentee during the cancellation proceedings,
the patent and the invention to which it relates meet the requirement of
this Act, it may decide to maintain the patent as amended: Provided,
That the fee for printing of a new patent is paid within the time limit
prescribed in the Regulations.
65.3. If the fee for the printing of a new patent is not paid in due time,
the patent should be revoked.
65.4. If the patent is amended under Subsection
65.5. Thereof, the Bureau shall, at the same time as it publishes the
mention of the cancellation decision, publish the abstract,
representative claims and drawings indicating clearly what the
amendments consist of. (n)
Section 66. Effect of Cancellation of Patent or Claim. - The rights

conferred by the patent or any specified claim or claims cancelled shall
terminate. Notice of the cancellation shall be published in the IPO
Gazette. Unless restrained by the Director General, the decision or
order to cancel by Director of Legal Affairs shall be immediately
executory even pending appeal. (Sec. 32, R.A. No. 165a)
Section 79. Limitation of Action for Damages. - No damages can be

recovered for acts of infringement committed more than four (4) years
before the institution of the action for infringement. (Sec. 43, R.A. No.
165)
Section 81. Defenses in Action for Infringement. - In an action for

infringement, the defendant, in addition to other defenses available to
him, may show the invalidity of the patent, or any claim thereof, on any
P a g e | 99
of the grounds on which a petition of cancellation can be brought under
Section 61 hereof. (Sec. 45, R.A. No. 165)
Section 82. Patent Found Invalid May be Cancelled. - In an action for

infringement, if the court shall find the patent or any claim to be
invalid, it shall cancel the same, and the Director of Legal Affairs upon
receipt of the final judgment of cancellation by the court, shall record
that fact in the register of the Office and shall publish a notice to that
effect in the IPO Gazette. (Sec. 46, R.A. No. 165a)
Patent Infringement
 Ordinarily understood to mean as the unauthorized replication or

use of a patented invention or process. Technically, however, patent
infringement is committed either literally or by equivalents.
 Literal infringement exists when every limitation recited in a

patent claim is found in the infringing device (or process). Infringement
by equivalents, on the other hand, happens when a device (or process)
appropriates a prior invention by incorporating its innovative concept
and, although with some modification and change, performs
substantially the same function in substantially the same way to
achieve substantially the same result.
Doctrine of Equivalents
 Legal Basis:
Section 75.2. For the purpose of determining the extent of protection

conferred by the patent, due account shall be taken of elements which
are equivalent to the elements expressed in the claims, so that a claim
shall be considered to cover not only all the elements as expressed
therein, but also equivalents. (n)
(a)n infringement also occurs when a device appropriates a prior

invention by incorporating its innovative concept and, albeit with some
modification and change, performs substantially the same function in
substantially the same way to achieve substantially the same result."
The reason for the doctrine of equivalents is that to permit the imitation
of a patented invention which does not copy any literal detail would be
to convert the protection of the patent grant into a hollow and useless
thing. Such imitation would leave room for - indeed encourage - the
P a g e | 100
unscrupulous copyist to make unimportant and insubstantial changes
and substitutions in the patent which, though adding nothing, would be
enough to take the copied matter outside the claim, and hence outside
the reach of the law. Pascual Godines v. Court of Appeals, et al. (G.R.
No. 97343), September 13, 1993 Smith Kline Beckman Corp. v. Court
of Appeals, et al. (G.R. No. 126627), August 14, 2003)
TRADEMARKS
 A trademark can be one word, a group of words, sign, symbol,

logo, or a combination of any of these. Generally, a trademark refers to
both trademark and service mark, although a service mark is used to
identify those marks used for services only.
 Section 121.1. "Mark" means any visible sign capable of

distinguishing the goods (trademark) or services (service mark) of an
enterprise and shall include a stamped or marked container of goods;
(Sec. 38, R.A. No. 166a)
 Section 121.2. "Collective mark" means any visible sign
designated as such in the application for registration and capable of
distinguishing the origin or any other common characteristic, including
the quality of goods or services of different enterprises which use the
sign under the control of the registered owner of the collective mark;
(Sec. 40, R.A. No. 166a)
 Section 122. How Marks are Acquired. - The rights in a mark

shall be acquired through registration made validly in accordance with
the provisions of this law. (Sec. 2-A, R A. No. 166a)
Registration gives the trademark owner the exclusive right to use the
mark and to prevent others from using the same or similar marks on
identical or related goods and services.
The right to a trademark is granted to the one who first files a

trademark application with the IP Philippines. Before applying for
trademark registration, it would help if you conduct a search in the
trademarks database to determine if there are identical or similar marks
that would prevent the registration of your mark. This is to prevent
future conflicts with marks that are already registered or with earlier
filing dates.
What cannot be registered
DESCRIPTIVE
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These are marks that describe the characteristics of the goods or
services.
MISLEADING
Marks that are likely to deceive or have the tendency to misinform the
consumers about the actual characteristics of the goods or services.
GENERIC and customary to trade
Generic marks are names of products they seek to identify.
CONSISTS OF NAMES, PORTRAITS OF PERSONS, MAPS,

FLAGS AND OTHER POLITICAL SYMBOLS
Marks that contain names or portraits of living individuals may be

rejected unless the individual gives written consent
SHAPE AND COLOR
Shapes must be distinctive from the usual shape of goods or containers

of the goods, in order to be considered a trademark.
 MARKS THAT MAY CAUSE CONFUSION
Your mark cannot be registered if it is identical with or similar to a

registered mark or a mark with earlier filing date for goods and services
that are exactly the same or for goods and services that are related.
Consumers should not confuse your mark with the marks of others.
Identical with, or confusingly similar to WELL-KNOWN MARKS
Marks that are identical with or similar to marks that are known
internationally and, in the Philippines, will be refused registration
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DOMINANCY AND HOLISTIC TESTS;
 In determining similarity and likelihood of confusion,

jurisprudence has developed two tests, the dominancy test and the
holistic test. Tests are applied in cases involving INFRINGEMENT
The totality or holistic test only relies on visual comparison between

two trademarks whereas the dominancy test relies not only on the
visual but also on the aural and connotative comparisons and overall
impressions between the two trademarks
Section 155 of R.A. No. 8293 states:
Remedies; Infringement. — Any person who shall, without the consent

of the owner of the registered mark:
 155.1. Use in commerce any reproduction, counterfeit, copy, or

colorable imitation of a registered mark or the same container or a
dominant feature thereof in connection with the sale, offering for sale,
distribution, advertising of any goods or services including other
preparatory steps necessary to carry out the sale of any goods or
services on or in connection with which such use is likely to cause
confusion, or to cause mistake, or to deceive; or
 155.2. Reproduce, counterfeit, copy or colorably imitate a registered

mark or a dominant feature thereof and apply such reproduction,
counterfeit, copy or colorable imitation to labels, signs, prints,
packages, wrappers, receptacles or advertisements intended to be used
in commerce upon or in connection with the sale, offering for sale,
distribution, or advertising of goods or services on or in connection
with which such use is likely to cause confusion, or to cause mistake,
or to deceive, shall be liable in a civil action for infringement by the
registrant for the remedies hereinafter set forth: Provided, That the
infringement takes place at the moment any of the acts stated in
Subsection 155.1 or this subsection are committed regardless of
whether there is actual sale of goods or services using the infringing
material.
The Elements of infringement under R.A. No. 8293 are as follows:

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1. The trademark being infringed is registered in the Intellectual Property

Office; however, in infringement of trade name, the same need not be
registered;
2. The trademark or trade name is reproduced, counterfeited, copied, or

colorably imitated by the infringer;
3. The infringing mark or trade name is used in connection with the sale,
offering for sale, or advertising of any goods, business or services; or
the infringing mark or trade name is applied to labels, signs, prints,
packages, wrappers, receptacles or advertisements intended to be used
upon or in connection with such goods, business or services;
4. The use or application of the infringing mark or trade name is likely to

cause confusion or mistake or to deceive purchasers or others as to the
goods or services themselves or as to the source or origin of such goods
or services or the identity of such business; and
5. It is without the consent of the trademark or trade name owner or the

assignee thereof.
The element of likelihood of confusion is the gravamen of trademark

infringement. There are two types of confusion in trademark
infringement: confusion of goods and confusion of
business. SOCIETE DES PRODUITS NESTLE, S.A., vs. MARTIN
T. DY, JR. G.R. No. 172276, August 8, 2010.
The dominancy test focuses on the similarity of the main, prevalent or

essential features of the competing trademarks that might cause
confusion. Infringement takes place when the competing trademark
contains the essential features of another. Imitation or an effort to
imitate is unnecessary. The question is whether the use of the marks is
likely to cause confusion or deceive purchasers.
The holistic test considers the entirety of the marks, including labels
and packaging, in determining confusing similarity. The focus is not
only on the predominant words but also on the other features appearing
on the labels.
In cases involving trademark infringement, no set of rules can be

deduced. Each case must be decided on its own merits. Jurisprudential
P a g e | 104
precedents must be studied in the light of the facts of each particular
case.
Withal, the protection of trademarks as intellectual property is intended

not only to preserve the goodwill and reputation of the business
established on the goods bearing the mark through actual use over a
period of time, but also to safeguard the public as consumers against
confusion on these goods. While respondent’s shoes contain some
dissimilarities with petitioner’s shoes, this Court cannot close its eye to
the fact that for all intents and purpose, respondent had deliberately
attempted to copy petitioner’s mark and overall design and features of
the shoes. Let it be remembered, that defendants in cases of
infringement do not normally copy but only make colorable changes.
The most successful form of copying is to employ enough points of
similarity to confuse the public, with enough points of difference to
confuse the courts. SKECHERS USA, INC., vs. INTER PACIFIC
INDUSTRIAL TRADING CORPORATION, GR no.164321
(March 2011)
Jurisprudence also formulated the following “true test” of unfair

competition: whether the acts of the defendant have the intent of
deceiving or are calculated to deceive the ordinary buyer making his
purchases under the ordinary conditions of the particular trade to which
the controversy relates. One of the essential requisites in an action to
restrain unfair competition is proof of fraud; the intent to deceive,
actual or probable must be shown before the right to recover can exist.
SUPERIOR COMMERCIAL ENTERPRISES INC., vs. KUNNAN
ENTERPRISES LTD. AND SPORTS CONCEPT &
DISTRIBUTOR, INC., G.R.No.169974, April 2010
Unfair competition has been defined as the passing off (or palming off)
or attempting to pass off upon the public of the goods or business of
one person as the goods or business of another with the end and
probable effect of deceiving the public. The essential elements of
unfair competition are (1) confusing similarity in the general
appearance of the goods; and (2) intent to deceive the public and
defraud a competitor. SUPERIOR COMMERCIAL ENTERPRISES
P a g e | 105
INC., vs. KUNNAN ENTERPRISES LTD. AND SPORTS
CONCEPT & DISTRIBUTOR, INC., G.R.No.169974, April 2010
In McDonald’s Corporation v. L.C. Big Mak Burger, Inc., we held that

there can be trademark infringement without unfair competition
such as when the infringer discloses on the labels containing the
mark that he manufactures the goods, thus preventing the public
from being deceived that the goods originate from the trademark
owner. SUPERIOR COMMERCIAL ENTERPRISES INC., vs.
KUNNAN ENTERPRISES LTD. AND SPORTS CONCEPT &
DISTRIBUTOR, INC., G.R.No.169974, April 2010
Hoarding is not Unfair Competition and does not fall within IP

Code
 Given the IP Code's specific focus, a first test that should be made
when a question arises on whether a matter is covered by the Code is to
ask if it refers to an intellectual property as defined in the Code. If it
does not, then coverage by the Code may be negated.
 A second test, if a disputed matter does not expressly refer to an

intellectual property right as defined above, is whether it falls under the
general "unfair competition" concept and definition under Sections
168.1 and 168.2 of the Code. The question then is whether there is
"deception" or any other similar act in "passing off" of goods or
services to be those of another who enjoys established goodwill.
 Under all the above approaches, we conclude that the "hoarding" -

as defined and charged by the petitioner - does not fall within the
coverage of the IP Code and of Section 168 in particular. It does not
relate to any patent, trademark, trade name or service mark that the
respondents have invaded, intruded into or used without proper
authority from the petitioner. Nor are the respondents alleged to be
fraudulently "passing off" their products or services as those of the
petitioner. The respondents are not also alleged to be undertaking any
P a g e | 106
representation or misrepresentation that would confuse or tend to
confuse the goods of the petitioner with those of the respondents, or
vice versa. What in fact the petitioner alleges is an act foreign to the
Code, to the concepts it embodies and to the acts it regulates; as
alleged, hoarding inflicts unfairness by seeking to limit the opposition's
sales by depriving it of the bottles it can use for these sales. (Coca-
Cola Bottlers, Phils., Inc. vs. Quintin J. Gomez, et al., G.R. No.
154491, November 14, 2008)
Who is deemed guilty of unfair competition
Essentially, what the law punishes is the act of giving one's goods the
general appearance of the goods of another, which would likely
mislead the buyer into believing that such goods belong to the latter.
Examples of this would be the act of manufacturing or selling shirts
bearing the logo of an alligator, similar in design to the open-jawed
alligator in La Coste shirts, except that the jaw of the alligator in the
former is closed, or the act of a producer or seller of tea bags with red
tags showing the shadow of a black dog when his competitor is
producing or selling popular tea bags with red tags showing the shadow
of a black cat.
Manuel C. Espiritu, Jr., et al. vs. Petron Corp., et al., (G.R. No.
170891, November 24, 2009)
A “collective mark” as any visible sign designated as such in the

application for registration and capable of distinguishing the origin or
any other common characteristic, including the quality of goods or
services of different enterprises which use the sign under the control of
the registered owner of the collective mark. (Section 122, RA 8293)
CONTINUING OFFENSE
 Respondent's imitation of the general appearance of petitioner's goods

was done allegedly in Cavite. It sold the goods allegedly in
P a g e | 107
Mandaluyong City, Metro Manila. The alleged acts would constitute a
transitory or continuing offense. Thus, clearly, under Section 2 (b) of
Rule 126, Section 168 of Rep. Act No. 8293 and Article 189 (1) of the
Revised Penal Code, petitioner may apply for a search warrant in any
court where any element of the alleged offense was committed,
including any of the courts within the National Capital Region (Metro
Manila).
Sony Computer Entertainment, Inc. vs. Supergreen, Inc., (G.R. No.

161823, March 22, 2007)
COPYRIGHT
Copyright is the legal protection extended to the owner of the rights in

an original work.
“Original work” refers to every production in the literary, scientific and

artistic domain. Among the literary and artistic works enumerated in
the IP Code includes books and other writings, musical works, films,
paintings and other works, and computer programs.
Works are protected by the sole fact of their creation, irrespective of

their mode or form of expression, as well as their content, quality and
purpose. Thus, it does not matter if, in the eyes of some critics, a
certain work has little artistic value. So long as it has been
independently created and has a minimum of creativity, the same
enjoys copyright protection.
Section 172 of the IP Code lists the works covered by copyright

protection from the moment of their creation
There are two types of rights under copyright:
1. economic rights, so-called because they enable the creator to obtain

remuneration from the exploitation of his works by third parties, and
P a g e | 108
2. moral rights, which makes it possible for the creator to undertake
measures to maintain and protect the personal connection between
himself and the work.
 Economic rights include:

 Reproduction
 Transformation First public distribution
 Rental
 Public display
 Public performance
 Other communication to the public of the work.
 Moral rights include:

 Right of Attribution
 Right of Alteration
 Right of Integrity (object to any prejudicial distortion)
 Right to restrain use of his name.
Related Rights in Copyright:
 Authors create works to disseminate them to as large an audience as

possible. Obviously, they cannot do the dissemination by themselves.
They need the help of persons or entities who contribute substantial
creative, technical or organizational skill in the process of making the
works available to the public and whose interests ought to be protected
to encourage them to continue with their work. Hence, their rights are
referred to as “related rights” or “neighboring rights” since they are
related to or are neighboring on the author’s copyright.
The related rights of: (a) performers; (b) producers of sound recordings;
and (c) broadcasting organizations.
 The natural person who created the literary and artistic work owns
the copyright to the same.
For work created during or in the course of employment (works for

hire):
Employee - if the work is not part of his regular duties, even if he used
the time, facilities and materials of the employer;
P a g e | 109
Employer - if the work is the result of the performance of his regularly
assigned duties unless there is an express or implied agreement to the
contrary.
For commissioned works: the person who commissioned the work

owns the work but the copyright thereto remains with the creator unless
there is a written agreement to the contrary.
For audiovisual works: the producer, the author of the scenario, the
composer of the music, the film director, and the author of the work so
adapted.
In general, the term of protection of copyright for original and

derivative works is the life of the author plus fifty (50) years after his
death. The Code specifies the terms of protection for the different types
of works.
For audiovisual works: the producer, the author of the scenario, the
composer of the music, the film director, and the author of the work so
adapted.
In calculating the term of protection, the term of protection subsequent

to the death of the author shall run from the date of his death or of
publication, but such terms shall always be deemed to begin on the first
day of January of the year following the event which gave rise to them
(i.e. death, publication, making).
 Copyright protection is not intended to give the copyright owner

absolute control over all possible exploitation of his work. The law
provides for limitations (“statutory fair uses”) on the economic rights
of authors comprising of acts which do not constitute copyright
infringement even if done without the consent of the copyright holder
 Copyright infringement consists in infringing any right secured or

protected under the Code. It may also consist in aiding or abetting such
infringement.
 The law also provides for the liability of a person who at the time
when copyright subsists in a work has in his possession an article
which he knows, or ought to know, to be an infringing copy of the
work for the purpose of:
P a g e | 110
 Selling or letting for hire, or by way of trade offering or
exposing for sale or hire, the article;
 Distributing the article for the purpose of trade, or for any
other purpose to an extent that will prejudice the rights of the copyright
owner in the work; or
 Trade exhibit of the article in public.
 Copyright, in the strict sense of the term, is purely a statutory right.

It is a new or independent right granted by the statute, and not simply a
pre-existing right regulated by it. Being a statutory grant, the rights are
only such as the statute confers, and may be obtained and enjoyed only
with respect to the subjects and by the persons, and on terms and
conditions specified in the statute. Accordingly, it can cover only the
works falling within the statutory enumeration or description.
 A copyright certificate provides prima facie evidence of originality

which is one element of copyright validity. It constitutes prima facie
evidence of both validity and ownership and the validity of the facts
stated in the certificate.
When is there a substantial reproduction of a book? It does not

necessarily require that the entire copyrighted work, or even a large
portion of it, be copied. If so much is taken that the value of the
original work is substantially diminished, there is an infringement of
copyright and to an injurious extent, the work is appropriated. (Pacita
I. Habana, et al. vs. Felicidad C. Robles, et al., G.R. No. 131522,
July 19, 1999; Filipino Society of Composers vs. Benjamin Tan,
(G.R. No. L-36402, March 16, 1987)
 The essence of a copyright infringement is the similarity or at least

substantial similarity of the purported pirated works to the copyrighted
work. Hence, the applicant must present to the court the copyrighted
films to compare them with the purchased evidence of the video tapes
allegedly pirated to determine whether the latter is an unauthorized
reproduction of the former. This linkage of the copyrighted films to the
pirated films must be established to satisfy the requirements of
probable cause. Mere allegations as to the existence of the copyrighted
films cannot serve as basis for the issuance of a search warrant.
20th Century Fox Film Corp. vs. Court of Appeals, G.R. Nos. L-
76649-51, August 19, 1988; Columbia Pictures Industries, Inc., et
al. vs. Court of Appeals, et al., (G.R. No. 97156, October 6, 1994)
P a g e | 111
Infringement of a copyright is a trespass on a private domain owned

and occupied by the owner of the copyright, and, therefore, protected
by law, and infringement of copyright, or piracy, which is a
synonymous term in this connection, consists in the doing by any
person, without the consent of the owner of the copyright, of anything
the sole right to do which is conferred by statute on the owner of the
copyright.
Pacita I. Habana, et al. vs. Felicidad C. Robles, et al., G.R. No.

131522, July 19, 1999; Wilson Ong Ching Kian Chuan vs. Court of
Appeals, et al., (G.R. No. 130360, August 15, 2000)
 The presentation of master tapes is not always necessary to meet the

requirement of probable cause in copyright infringement cases
 It is true that such master tapes are object evidence, with the merit
that in this class of evidence the ascertainment of the controverted fact
is made through demonstrations involving the direct use of the senses
of the presiding magistrate. Such auxiliary procedure, however, does
not rule out the use of testimonial or documentary evidence,
depositions, admissions or other classes of evidence tending to prove
the factum probandum, especially where the production in court of
object evidence would result in delay, inconvenience or expenses out of
proportion to its evidentiary value.
Columbia Pictures, Inc. vs. Court of Appeals, et al., G.R. No.

110318, August 28, 1996; Columbia Pictures Entertainment, Inc.,
et al. vs. Court of Appeals, et al., G.R. No. 111267, September 20,
1996; People of the Phil., et al. vs. Christopher Choi, (G.R. No.
152950, August 3, 2006)
At most, the certificates of registration and deposit issued by the

National Library and the Supreme Court Library serve merely as a
notice of recording and registration of the work but do not confer any
right or title upon the registered copyright owner or automatically put
his work under the protective mantle of the copyright law. It is not a
conclusive proof of copyright ownership. As it is, non-registration and
deposit of the work within the prescribed period only makes the
copyright owner liable to pay a fine.
P a g e | 112
Manly Sportwear Mfg., Inc. vs. Dadodette Ent., et al., (G.R. No.
165306, September 20, 2005)
It is not the application or registration of a trademark that vests

ownership thereof, but it is the ownership of a trademark that confers
the right to register the same. Registration merely creates a prima facie
presumption of the validity of the registration, of the registrant’s
ownership of the trademark, and of the exclusive right to the use
thereof; it is rebuttable; thus, it must give way to evidence to the
contrary.
Birkenstock Orthopaedie Gmbh and Co. Kg vs. Philippine Shoe

Expo Marketing Corporation, (G.R. No. 194307, November 20,
2013)
The gravamen of the offense of infringement of a registered trademark

is the likelihood of confusion. In applying the Holistic Test, confusion
was remote because the jeans made and sold by Levi’s Philippines
were not only very popular but also quite expensive, as opposed to
Diaz’s tailored jeans which were acquired on a “made-to-order” basis;
moreover, since the jeans are expensive, the casual buyer is
predisposed to be more cautious and discriminating in and would prefer
to mull over his purchase. (Victorio Diaz vs. People of the Philippines,
G.R. No. 180677, February 18, 2013)
The mere unauthorized use of a container bearing a registered

trademark in connection with the sale, distribution or advertising of
goods or services which is likely to cause confusion among the buyers
or consumers can be considered as trademark infringement. Petitioners’
act of refilling, without the respondents’ consent, the LPG containers
bearing the registered marks of the respondents will inevitably confuse
the consuming public, who may also be led to believe that the
petitioners were authorized refillers and distributors of respondent’s
LPG products.
Republic Gas Corporation (REGASCO), et. al. vs. Petron

Corporation, et. al., (G.R. No. 194062, June 17, 2013)
The Rules on the Issuance of the Search and Seizure in Civil ctions for
Infringement of Intellectual Property Rights are not applicable in a case
P a g e | 113
where the search warrants were applied in anticipation of criminal
actions for violation of intellectual property rights under RA 8293.
Rule 126 of the Revised Rules of Court would apply and a warrant
shall be validly issued upon finding the existence of probable cause.
Century Chinese Medicine Co., et. al. vs. People of the Philippines,
(G.R. No. 188526, November 11, 2013)
Unfair competition has been defined as the passing off (or palming off)
or attempting to pass off upon the public of the goods or business of
one person as the goods or business of another with the end and
probable effect of deceiving the public. The mere use of the LPG
cylinders for refilling and reselling, which bear the trademarks
"GASUL" and "SHELLANE" will give the LPGs sold by REGASCO
the general appearance of the products of the petitioners.
Republic Gas Corporation (REGASCO), et. al. vs. Petron

Corporation, et. al., (G.R. No. 194062, June 17, 2013)
Under the Paris Convention to which the Philippines is a signatory, a

trade name of a national of a State that is a party to the Paris
Convention, whether or not the trade name forms part of a trademark, is
protected without the obligation of filing or registration. It follows then
that the applicant for registration of trademark is not the lawful owner
thereof and is not entitled to registration if the trademark has been in
prior use by a national of a country which is a signatory to the Paris
Convention.
EcoleDe Cuisine Manille (Cordon Bleu of the Philippines), Inc. vs.
Renaus Cointreau & Cie and Le Cordon Bleu Int’l, B.V., (G.R. No.
185830, June 5, 2013)

P a g e | 114
NEGOTIABLE INSTRUMENTS LAW
The principal consideration always to answer any purported question

on negotiable instruments is to determine first whether indeed it is
negotiable and compliant with the provision of section 1 of the
Negotiable Instruments Law.
In the case of Rodrigo Rivera vs. Spouses Chua (GR no.184458,

January 14, 2015), the Supreme Court noted that a promissory note
made out to a specific person is not a negotiable instrument, it is not
even payable to order or bearer.
In the same case, the Supreme Court reiterated that Section 1 of the
Negotiable Instruments Law requires the concurrence of the following
elements, and that the absence of one makes the instrument non-
negotiable,1 to wit:
1. It must be in writing and signed by the maker or drawer;

2. It must contain an unconditional promise or order to pay a sum certain
in money;
3. Must be payable on demand, or at a fixed or determinable future time;
4. Must be payable to order or bearer; and
5. Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
This does not mean however that, even if the instrument is not
negotiable, there is no more liability to be incurred under the terms of
the promissory note issued that remains to be unpaid.
Even if the promissory note is non-negotiable and therefore outside of

the coverage of section 702 of the law which provides that presentment
for payment is not necessary to charge the person liable on the
instrument, liability for damages, including those who are guilty of
delay in the performance of their obligation is laid down under Article
11703 of the Civil Code of the Philippines.
1
Section 1, Negotiable Instruments Law
2
Section 70, Effect of want of demand on principal debtor. – Presentment for payment is not necessary in order to
charge the person primarily liable on the instrument; but if the instrument is, by its terms, payable at a special place,
and he is able and willing to pay it there at maturity, such ability and willingness are equivalent to tender of payment
upon his part. But except as herein otherwise provided, presentment for payment is necessary in order to charge the
drawer and indorsers.
P a g e | 115
REQUISITES OF NEGOTIABILITY:
• Note Section 1 in relation to sections 2 – 23
• Requisites
1. It must be in writing
2. It must contain an unconditional promise to pay a sum
certain money
3. It must be payable on demand, or at a fixed or
determinable future time
4. It must be payable to order or to bearer
RULE ON FORGERY:
• Liability of Bank for payment
• As a general rule, a bank or corporation who has obtained

possession of a check upon an unauthorized or forged
indorsement of the payee’s signature and who collects the
amount of the check from the drawee, is liable for the proceeds
thereof to the payee or other owner, notwithstanding that the
amount has been paid to the person from whom the check was
obtained.
• The theory of the rule is that the possession of the check on the
forged or unauthorized indorsement is wrongful and when the
money had been collected on the check, the proceeds are held for
the rightful owners who may recover them. The payee ought to
be allowed to recover directly from the collecting bank,
regardless of whether the check was delivered to the payee or
not. (Westmont Bank (formerly Associated Banking Corp.) vs.
Eugene Ong, G.R. No. 132560, January 30, 2002)
• It is a rule that when a signature is forged or made without the

authority of the person whose signature it purports to be, the
check is wholly inoperative and no right to retain the instrument,
or to give a discharge therefor, or to enforce payment thereof
against any party, can be acquired through or under such
signature.
• EXCEPTION:
3
Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those
who in any manner contravene the tenor thereof, are liable for damages.
P a g e | 116
However, the rule does provide for an exception, namely:
"unless the party against whom it is sought to enforce such right
is precluded from setting up the forgery or want of authority."
In the instant case, it is the exception that applies as the

petitioner is precluded from setting up the forgery, assuming
there is forgery, due to his own negligence in entrusting to his
secretary his credit cards and checkbook including the
verification of his statements of account. (Ramon K. Ilusorio vs.
Hon. Court of Appeals, G.R. No. 139130, November 27, 2002)
Concept of Material Alteration
Sec. 124. Alteration of instrument; effect of. - Where a negotiable

instrument is materially altered without the assent of all parties liable
thereon, it is avoided, except as against a party who has himself made,
authorized, or assented to the alteration and subsequent indorsers.
But when an instrument has been materially altered and is in the hands
of a holder in due course not a party to the alteration, he may enforce
payment thereof according to its original tenor.
Sec. 125. What constitutes a material alteration. - Any alteration which

changes:
(a) The date;
(b) The sum payable, either for principal or interest;

(c) The time or place of payment:

(d) The number or the relations of the parties;

(e) The medium or currency in which payment is to be made;

(f) Or which adds a place of payment where no place of payment is
specified, or any other change or addition which alters the effect of the
instrument in any respect, is a material alteration
 Deficiencies that DO NOT AFFECT the rights of a subsequent

HIDC:
1. Incomplete but delivered instrument (section 14)

P a g e | 117
2. Complete but undelivered (section 16)
3. Complete and delivered issued without consideration or a consideration
consisting of a promise which was not fulfilled. (section 28)
 Deficiencies that AFFECT THE RIGHTS OF A HIDC:
1. Incomplete but undelivered instrument (sec.15)

2. Maker/Drawer’s signature forged
 Sec. 26. What constitutes holder for value. - Where value has at
any time been given for the instrument, the holder is deemed a holder
for value in respect to all parties who become such prior to that time.
 Absence or failure of consideration is a matter of defense as
against any person not a holder in due course; and partial failure of
consideration is a defense pro tanto, whether the failure is an
ascertained and liquidated amount or otherwise. (section 28)
Absence or failure of consideration is not inadequacy of consideration

under Art. 1355 of the Civil Code.
Sec. 40. Indorsement of instrument payable to bearer. - Where an

instrument, payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery; but the person
indorsing specially is liable as indorser to only such holders as
make title through his indorsement.
Sec. 48. Striking out indorsement. - The holder may at any time
strike out any indorsement which is not necessary to his title. The
indorser whose indorsement is struck out, and all indorsers
subsequent to him, are thereby relieved from liability on the
instrument.
Where the holder of an instrument payable to his order transfers it

for value without indorsing it, the transfer vests in the transferee
such title as the transferor had therein, and the transferee acquires
in addition, the right to have the indorsement of the transferor.
 Sec. 47. Continuation of negotiable character. - An instrument

negotiable in its origin continues to be negotiable until it has been
restrictively indorsed or discharged by payment or otherwise.
 Sec. 34. Special indorsement; indorsement in blank. - A special

indorsement specifies the person to whom, or to whose order, the
instrument is to be payable, and the indorsement of such indorsee is
necessary to the further negotiation of the instrument. An indorsement
in blank specifies no indorsee, and an instrument so indorsed is
payable to bearer, and may be negotiated by delivery.
P a g e | 118
5. Sec. 35. Blank indorsement; how changed to special indorsement. -

The holder may convert a blank indorsement into a special indorsement
by writing over the signature of the indorser in blank any contract
consistent with the character of the indorsement.
 Sec. 39. Conditional indorsement. - Where an indorsement is

conditional, the party required to pay the instrument may disregard the
condition and make payment to the indorsee or his transferee whether
the condition has been fulfilled or not. But any person to whom an
instrument so indorsed is negotiated will hold the same, or the proceeds
thereof, subject to the rights of the person indorsing conditionally.
(Endorser binds himself to pay, upon no other condition than the failure
of the parties to do so, and of due notice to him of such failure)
 Endorser binds himself to pay, upon no other condition than the

failure of the parties to do so, and of due notice to him of such failure
 Sec. 119. Instrument; how discharged. - A negotiable instrument

is discharged:
(a.) By payment in due course by or on behalf of the principal

debtor;
(b.) By payment in due course by the party accommodated,
where the instrument is made or accepted for his accommodation;
(c.)By the intentional cancellation thereof by the holder;
(d.) By any other act which will discharge a simple contract for
the payment of money;
(e.) When the principal debtor becomes the holder of the
instrument at or after maturity in his own right.
6. Sec. 38. Qualified indorsement. - A qualified indorsement

constitutes the indorser a mere assignor of the title to the
instrument. It may be made by adding to the indorser's signature
the words "without recourse" or any words of similar import. Such
an indorsement does not impair the negotiable character of the
instrument.
Has limited liability, i.e., he is liable if the instrument is dishonored by

non-acceptance or non-payment due to:
Forgery;
lack of good title on the part of endorser
• lack of capacity to endorse on the part of the prior parties’
fact that at the time of endorsement, the instrument was valueless, or
nor valid, and he knew of the fact.
Classes of Holder
P a g e | 119
 Simple Holder (section 51)

 Holder for value (section 26)
 HIDC (secs.52 and 57)
Rights of Holders in General
1. A holder:
a. May Sue thereon in his own name
b. Payment to him in due course discharges the instrument (section 88)
2. In the hands of a holder other a HIDC, a negotiable instrument is
subject to the same defenses as if it were non-negotiable
HOLDER IN DUE COURSE
 Defined under section 52

 Section 53 in relation to section 193
 Section 54 “Reasonable Period” - 90 days in relation to BP 22.
Defenses
REAL DEFENSES PERSONAL DEFENSES

Forgery Duress (intimidation)
Illegality Illegality
Alteration (deliberate) Discharge before maturity
Discharge after maturity Alteration (unintentional)
Incompleteness Fraud in inducement

Fraud in Factum Incompleteness (delivered)
Incapacity No consideration
Insolvency Set-off
Real Defenses
 Those available against ALL holders.

 They attach to the res regardless of the merits or demerits of the
holder
 Real defenses do not render the instrument valueless.
 The instrument is unenforceable only against the party entitled to set
up the defense but not against those whom such a defense is not
P a g e | 120
available as such, as in the case of forgery which is not available to
persons estopped. (sec.23)
Examples of Real Defense
 Section 15
 Section 23
 Section 14 (fraud in factum or fraud in esse contractus)
 Fraudulent alteration by holder (secs.124 and 125)
 Prescription; Discharge at or after maturity (secs.88, 118, 121 and
122)
Personal Defenses
 Those which grow out of the agreement or the conduct of a

particular person in regard to the instrument which renders it
inequitable for him, though holding the legal title, to enforce it against
the party sought to be made liable but which h are not available against
a HIDC.
 Filling up wrong date (sec.10, EO 173)
 Section 14
 Section 16
 Section 55 (absence or failure of consideration)
 Simple Fraud or fraud in inducement (sec.55)
 Acquisition of instrument by unlawful means (sec. 55)
Personal Defenses
 Negotiation in breach of faith (sec.55)

 Negotiation under circumstances that amount to fraud (sec.55)
 Innocent alteration or spoliation (secs.124-125)
 Set-off between immediate parties (sec.58) Discharge by payment
or renunciation or release before maturity (Secs. 50,121, 122)
 Discharge of party secondarily liable by discharge of prior party
(sec.20 [c])
LIABILITIES OF PARTIES
PARTY LIABILITY
Maker Sec. 60. Liability of maker. - The maker of a
negotiable instrument, by making it, engages
that he will pay it according to its tenor, and
admits the existence of the payee and his
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then capacity to indorse.
Sec. 61. Liability of drawer. - The drawer by
drawing the instrument admits the existence
of the payee and his then capacity to indorse;
and engages that, on due presentment, the
instrument will be accepted or paid, or both,
according to its tenor, and that if it be
Drawer dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the
amount thereof to the holder or to any
subsequent indorser who may be compelled
to pay it. But the drawer may insert in the
instrument an express stipulation negativing
or limiting his own liability to the holder.
Sec. 62. Liability of acceptor. - The
acceptor, by accepting the instrument,
engages that he will pay it according to the
tenor of his acceptance and admits:
Acceptor a. The existence of the drawer, the genuineness
of his signature, and his capacity and
authority to draw the instrument; and
b. The existence of the payee and his then
capacity to indorse.
 Acceptor is liable only to the original tenor of the bill prior to

alteration since section 132 defines acceptance as “assent to the order
of the drawer.”
 Sec. 63. When a person deemed indorser. - A person placing his

signature upon an instrument otherwise than as maker, drawer, or
acceptor, is deemed to be indorser unless he clearly indicates by
appropriate words his intention to be bound in some other capacity.

Is there any order in which indorsers are liable?
Sec. 68. Order in which indorsers are liable. - As respect one another,
indorsers are liable prima facie in the order in which they indorse; but
evidence is admissible to show that, as between or among themselves,
they have agreed otherwise. Joint payees or joint indorsees who
indorse are deemed to indorse jointly and severally.
 Primarily liable – Maker and Acceptor

 Secondarily liable - Drawer and Indorser
For PNs, it is necessary that:

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1. Presentment for payment must be made to the person
primarily liable (sec.71)
2. If the PN is dishonored by nonpayment, notice of dishonor by
nonpayment must be given to the person secondarily liable
(sec.80) unless excused.
3. In all other cases, it is necessary that;
4. Protest for nonpayment by drawee is necessary to charge an
acceptor for honor(sec.167); and
5. Protest for nonpayment by the acceptor for honor is also
required (sec.170)
What constitutes sufficient presentment
 Sec. 72. What constitutes a sufficient presentment. - Presentment

for payment, to be sufficient, must be made:
(a) By the holder, or by some person authorized to receive payment on his
behalf;
(b) At a reasonable hour on a business day;
(c) At a proper place as herein defined; To the person primarily liable on
the instrument, or if he is absent or inaccessible, to any person found at
the place where the presentment is made.
Sec. 74. Instrument must be exhibited. - The instrument must be

exhibited to the person from whom payment is demanded, and when it
is paid, must be delivered up to the party paying it.

Sec. 79. When presentment not required to charge the drawer. -
Presentment for payment is not required in order to charge the drawer
where he has no right to expect or require that the drawee or acceptor
will pay the instrument.
Sec. 80. When presentment not required to charge the indorser. -

Presentment is not required in order to charge an indorser where the
instrument was made or accepted for his accommodation and he has no
reason to expect that the instrument will be paid if presented.
Sec. 81. When delay in making presentment is excused. - Delay in

making presentment for payment is excused when the delay is caused
by circumstances beyond the control of the holder and not imputable to
his default, misconduct, or negligence. When the cause of delay ceases
to operate, presentment must be made with reasonable diligence.

The exceptions provided in secs. 79 and 80 are relative and pertain only
to the drawer and endorser involved, since as to other parties
secondarily liable, the lack of presentment discharges them.
Sec. 83. When instrument dishonored by non-payment. - The

instrument is dishonored by non-payment when:
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(a.) It is duly presented for payment and payment is refused or

cannot be obtained; or
(b.) Presentment is excused and the instrument is overdue and
unpaid.
Sec. 84. Liability of person secondarily liable, when instrument

dishonored. - Subject to the provisions of this Act, when the instrument
is dishonored by non-payment, an immediate right of recourse to all
parties secondarily liable thereon accrues to the holder.
NOTICE OF DISHONOR
Bringing either verbally or by writing, to the knowledge of the drawer
or endorser of an instrument, the fact that a specified negotiable
instrument, upon proper proceedings taken, has not been accepted or
has not been paid, and that the party notified is expected to pay it.
Sec. 89. To whom notice of dishonor must be given. - Except as herein

otherwise provided, when a negotiable instrument has been dishonored
by non-acceptance or non-payment, notice of dishonor must be given to
the drawer and to each indorser, and any drawer or indorser to whom
such notice is not given is discharged.
 Persons primarily liable need not be given notice of dishonor,

because they are the very ones who dishonored the instrument. This is
also the rule with respect to a joint maker and an accommodation
maker.
Sec. 90. By whom given. - The notice may be given by or on behalf of

the holder, or by or on behalf of any party to the instrument who might
be compelled to pay it to the holder, and who, upon taking it up, would
have a right to reimbursement from the party to whom the notice is
given.

Sec. 91. Notice given by agent. - Notice of dishonor may be given by
any agent either in his own name or in the name of any party entitled to
given notice, whether that party be his principal or not.
Discharge of Negotiable Instrument
It is the release of all parties, whether primary or secondary, from the

obligation on the instrument
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Discharge renders the instrument non-negotiable.
 Sec. 119. Instrument; how discharged. - A negotiable instrument is

discharged:
a. By payment in due course by or on behalf of the principal debtor;

b. By payment in due course by the party accommodated, where the
instrument is made or accepted for his accommodation;
c. By the intentional cancellation thereof by the holder;
d. By any other act which will discharge a simple contract for the
payment of money;
e. When the principal debtor becomes the holder of the instrument at or
after maturity in his own right.
 Sec. 120. When persons secondarily liable on the instrument are

discharged. - A person secondarily liable on the instrument is
discharged:
a. By any act which discharges the instrument;

b. By the intentional cancellation of his signature by the holder;
c. By the discharge of a prior party;
d. By a valid tender or payment made by a prior party;
e. By a release of the principal debtor unless the holder's right of recourse
against the party secondarily liable is expressly reserved;
f. By any agreement binding upon the holder to extend the time of
payment or to postpone the holder's right to enforce the instrument
unless made with the assent of the party secondarily liable or unless the
right of recourse against such party is expressly reserved.
 Sec. 121. Right of party who discharges instrument. - Where

the instrument is paid by a party secondarily liable thereon, it is not
discharged; but the party so paying it is remitted to his former rights as
regard all prior parties, and he may strike out his own and all
subsequent indorsements and against negotiate the instrument, except:
Where it is payable to the order of a third person and has been paid by
the drawer; and
Where it was made or accepted for accommodation and has been paid
by the party accommodated.
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ALTERATION
 Sec. 124. Alteration of instrument; effect of. - Where a negotiable

But when an instrument has been materially altered and is in the hands
 Sec. 125. What constitutes a material alteration? - Any alteration

which changes:
a. The date;
b. The sum payable, either for principal or interest;
c. The time or place of payment:
d. The number or the relations of the parties;
e. The medium or currency in which payment is to be made;
f. Or which adds a place of payment where no place of payment is
specified, or any other change or addition which alters the effect of the
instrument in any respect, is a material alteration
 Sec. 124. Alteration of instrument; effect of. - Where a negotiable

 But when an instrument has been materially altered and is in the hands
BILL OF EXCHANGE
 Sec. 126. Bill of exchange, defined. - A bill of exchange is an

unconditional order in writing addressed by one person to another,
signed by the person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or determinable future time a
sum certain in money to order or to bearer.
Pay to X or order P250,000.00
To: Y
sgd. Z
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Until Y accepts, he is not liable as acceptor because under sec.18,

drawee is never liable because his signature does not appear on the face
of instrument. Drawee must first accept.
 Sec. 127. Bill not an assignment of funds in hands of drawee. - A

bill of itself does not operate as an assignment of the funds in the hands
of the drawee available for the payment thereof, and the drawee is not
liable on the bill unless and until he accepts the same.
Rules pertaining to Bill of Exchange
 Sec. 128. Bill addressed to more than one drawee. - A bill may be
addressed to two or more drawees jointly, whether they are partners or
not; but not to two or more drawees in the alternative or in succession.
 Sec. 130. When bill may be treated as promissory note. - Where in a

bill the drawer and drawee are the same person or where the drawee is
a fictitious person or a person not having capacity to contract, the
holder may treat the instrument at his option either as a bill of exchange
or as a promissory note.
ACCEPTANCE
Definition
 Sec. 132. Acceptance; how made, by and so forth. - The acceptance of

a bill is the signification by the drawee of his assent to the order of the
drawer. The acceptance must be in writing and signed by the drawee. It
must not express that the drawee will perform his promise by any other
means than the payment of money.
 Sec. 133. Holder entitled to acceptance on face of bill. - The holder of

a bill presenting the same for acceptance may require that the
acceptance be written on the bill, and, if such request is refused, may
treat the bill as dishonored.
 Sec. 134. Acceptance by separate instrument. - Where an acceptance

is written on a paper other than the bill itself, it does not bind the
acceptor except in favor of a person to whom it is shown and who, on
the faith thereof, receives the bill for value.
 Sec. 136. Time allowed drawee to accept. - The drawee is allowed

twenty-four hours after presentment in which to decide whether or not
he will accept the bill; the acceptance, if given, dates as of the day of
presentation.
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Note: After 24 hours, drawee fails to return instrument, he will be
presumed to have impliedly accepted.
Kinds of Checks
1. Cashier’s Check - Drawn by cashier of bank, in the name of the bank

against the bank itself payable to a third person or order.
2. Manager’s Check – Drawn by the manager of a bank in the name of the

bank against the bank itself payable to a third person. Similar to
cashier’s check.
3. Memorandum Check – Check given by the borrower to a lender for the

amount of a short loan, with the understanding that it will not be
presented to a bank, but will be redeemed by maker himself when the
loan falls due and which understanding is evidenced by the writing the
word “memorandum,” “memo” on the check
Significance of the 90-day Period UNDER BP 22 For Presentment

of the Check
Arceo vs. People (2006)
Petitioner asserts that there was no violation of BP 22 because the

check was presented to the drawee bank only on December 5, 1991 or
120 days from the date thereof (August 4, 1991). He argues that this
was beyond the 90-day period provided under the law in connection
with the presentment of the check.
In Wong v. Court of Appeals, the Court ruled that the 90-day period
provided in the law is not an element of the offense. Neither does it
discharge petitioner from his duty to maintain sufficient funds in the
account within a reasonable time from the date indicated in the check.
According to current banking practice, the reasonable period
within which to present a check to the drawee bank is six months.
Thereafter, the check becomes stale and the drawer is discharged
from liability thereon to the extent of the loss caused by the delay.

Thus, Cenizal’s presentment of the check to the drawee bank 120 days
(four months) after its issue was still within the allowable period.
Petitioner was freed neither from the obligation to keep sufficient funds
in his account nor from liability resulting from the dishonor of the
check.
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What are the effects of a manager’s check and a cashier’s check, and
is the payment therein subject to the condition that the payee
complies with his obligations to the purchaser of the checks?
The Supreme Court in the case of Metropolitan Bank vs. Chiok (GR
no.172652, November 26, 2014) stated that,” The legal effects of a
manager’s check and a cashier’s check are the same. A manager’s
check, like a cashier’s check, is an order of the bank to pay, drawn
upon itself, committing in effect its total resources, integrity, and honor
behind its issuance. By its peculiar character and general use in
commerce, a manager’s check or cashier’s check is regarded
substantially to be as good as the money it represents.”
The Supreme Court however warned that, clearing of the manager’s

check and cashier’s checks should not be confused with acceptance.
Manager’s and Cashier’s checks are still subject to the clearing to
ensure that the same have not been materially altered or otherwise
completely counterfeited. It must be clarified however, that while they
are subject to clearing, these checks cannot be countermanded for being
drawn up against a closed account, for being drawn up against
insufficient funds, or for similar reasons such as a condition not
appearing on the face of the check. The accepted banking practice is
that these checks are good as cash.
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If a check is materially altered 4, will the 24-hour period for clearing
apply?
In Areza vs. Express Savings Bank (GR no.176697, September 10,

2014) , the Supreme Court ruled that, “as a rule now stands, the 24 hour
period is still in force, that is, any check which should be refused by the
drawee bank in accordance with the long standing and accepted
banking practices shall be returned through the PCHC/local clearing
office, as the case may be not later than the next regular clearing (24
hour).
The modification, however, is that items which have been the subject
of material alteration or bearing forged endorsement may be returned
even beyond the 24 hours so long that the same is returned within the
prescriptive period fixed by law. The prescriptive period is ten (10)
years because a check or endorsement thereon is a written contract.
Moreover, the item need not be returned through the clearing house but
by direct presentation to the presenting bank.”
A promissory note was indorsed to a financing company, and a

chattel mortgage over the property subject of the note was also
assigned to them. However, the actual property subject of the chattel
was never delivered to the mortgagee who decided not to pay the
principal loan as well since there was non-delivery of the property.
4
Section 125. What constitutes material alteration. Any alteration which changes:
a) The date;
b) The sum payable, either for principal or interest;
c) The time or place of payment;
d) The number or the relation of the parties;
e) The medium or currency in which payment is to be made; Or which adds a place of payment where no place of
payment is specified, or any other change or addition which alters the effect of the instrument in any respect is a
material alteration.
xxx
Section 124. Alteration of instrument; effect of. Where a negotiable instrument is materially altered without the
assent of all parties liable thereon, it is avoided, except as against a party who has
himself made, authorized, and assented to the alteration and subsequent indorsers.
But when the instrument has been materially altered and is in the hands of a holder in due course not a party to
the alteration, he may enforce the payment thereof according to its original tenor. (Emphasis ours.)

P a g e | 130
The Financing Company now seeks foreclosure. Is the Financing
Company who holds the promissory note a holder in due course?
Yes. The Financing Company is a holder in due course. Sec. 52 of the

Negotiable Instruments Law (NIL) provides:
Section 52. What constitutes a holder in due course. A holder in due
course is a holder who has taken the instrument under the following
conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without

notice that it had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any

infirmity in the instrument or defect in the title of the person
negotiating it.
A holder in due course, holds the instrument free from any defect of
title of prior parties and from defenses available to prior parties among
themselves, and may enforce payment of the instrument for the full
amount. Since the Financing Company is a holder in due course, the
mortgagor cannot raise the defense of non-delivery of the object and
nullity of the sale against the corporation. The NIL considers every
negotiable instrument prima facie to have been issued for a valuable
consideration. (Spouses Pedro Violago vs. BA Finance Corporation
[2008])
Can a check be used as evidence of indebtedness?
A check "constitutes an evidence of indebtedness" and is a veritable

"proof of an obligation.” Hence, it can be used "in lieu of and for the
same purpose as a promissory note. The Supreme Court has pointed out
that a check functions more than a promissory note since it not only
contains an undertaking to pay an amount of money but is an "order
addressed to a bank and partakes of a representation that the drawer has
funds on deposit against which the check is drawn, sufficient to ensure
payment upon its presentation to the bank. (Ting Ting Pua vs. Spouses
Lo Ben Ting [2013])
This very same principle underpins Section 24 of the Negotiable

Instruments Law (NIL), which provides as follows:
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Section 24. Presumption of consideration. – Every negotiable
instrument is deemed prima facie to have been issued for a valuable
consideration; and every person whose signature appears thereon to
have become a party for value.
Who is an accommodation party and what is his liability, if any?
An accommodation party is one who meets all the three requisites: (1)
he must be a party to the instrument, signing as maker, drawer,
acceptor, or indorser; (2) he must not receive value therefor; and (3) he
must sign for the purpose of lending his name or credit to some other
person. An accommodation party lends his name to enable the
accommodated party to obtain credit or to raise money; he receives no
part of the consideration for the instrument but assumes liability to the
other party/ies thereto. The accommodation party is liable on the
instrument to a holder for value even though the holder, at the time of
taking the instrument, knew him or her to be merely an accommodation
party, as if the contract was not for accommodation.
The relation between an accommodation party and the accommodated

party is one of principal and surety the accommodation party being the
surety. As such, he is deemed an original promisor and debtor from the
beginning; he is considered in law as the same party as the debtor in
relation to whatever is adjudged touching the obligation of the latter
since their liabilities are interwoven as to be inseparable. (Eusebio
Gonzales vs. PCIB [2011])
Although a contract of suretyship is in essence accessory or collateral

to a valid principal obligation, the suretys liability to the creditor
is immediate, primary and absolute; he is directly and equally bound
with the principal. As an equivalent of a regular party to the
undertaking, a surety becomes liable to the debt and duty of the
principal obligor even without possessing a direct or personal interest
in the obligations nor does he receive any benefit therefrom
P a g e | 132
CORPORATION CODE
Sec. 2. Corporation defined. — A corporation is an artificial being

created by operation of law, having the right of succession and the
powers, attributes and properties expressly authorized by law or
incident to its existence.
Classifications
 Municipal Corporations – corporations organized by the State for

purposes of governing portions of the State
 Public quasi corporations - private corporations that render public
service, supply public wants, or pursue other eleemosynary objectives.
While purposely organized for the gain or benefit of its members, they
are required by law to discharge functions for the public benefit.
Examples of these corporations are utility, 22 railroads, warehouse,
telegraph, telephone, water supply corporations and transportation
companies. 23 It must be stressed that a quasi-public corporation is a
species of private corporations, but the qualifying factor is the type of
service the former renders to the public: if it performs a public service,
then it becomes a quasi-public corporation. [G.R. No. 169752.
September 25, 2007.]; PHILIPPINE SOCIETY FOR THE
PREVENTION OF CRUELTY TO ANIMALS, petitioners, vs.
COMMISSION ON AUDIT, DIR. RODULFO J. ARIESGA (in his
official capacity as Director of the Commission on Audit), MS.
MERLE M. VALENTIN and MS. SUSAN GUARDIAN (in their
official capacities as Team Leader and Team Member, respectively, of
the audit Team of the Commission on Audit), respondents.
 The true criterion, therefore, to determine whether a corporation

is public or private is found in the totality of the relation of the
corporation to the State. If the corporation is created by the State as
the latter's own agency or instrumentality to help it in carrying out its
governmental functions, then that corporation is considered public;
otherwise, it is private. Applying the above test, provinces, chartered
cities, and barangays can best exemplify public corporations. They are
created by the State as its own device and agency for the
accomplishment of parts of its own public works.
 The Constitution vests in the COA audit jurisdiction over

"government-owned and controlled corporations with original
charters," as well as "government-owned or controlled corporations"
without original charters. GOCCs with original charters are subject to
COA pre-audit, while GOCCs without original charters are subject to
COA post-audit. GOCCs without original charters refer to corporations
created under the Corporation Code but are owned or controlled by the
P a g e | 133
government. The nature or purpose of the corporation is not material in
determining COA's audit jurisdiction. Neither is the manner of creation
of a corporation, whether under a general or special law.
 Stock Corporations – capital stock divided into shares and are

authorized to distribute profits on the basis of shares held.
- par value
- no par value
 Non-Stock – organized for non-profit purposes, do not issue stocks

and are composed of persons called as members
May no par value shares be issued by the corporation at different

prices?
Yes. "A no-par value share does not purport to represent any stated
proportionate interest in the capital stock measured by value, but only
an aliquot part of the whole number of such shares of the issuing
corporation. The holder of no-par shares may see from the certificate
itself that he is only an aliquot sharer in the assets of the corporation.
But this character of proportionate interest is not hidden beneath a false
appearance of a given sum in money, as in the case of par value shares.
The capital stock of a corporation issuing only no-par value shares is
not set forth by a stated amount of money, but instead is expressed to
be divided into a stated number of shares, such as, 1,000 shares. This
indicates that a shareholder of 100 such shares is an aliquot sharer in
the assets of the corporation, no matter what value they may have, to
the extent of 100/1,000 or 1/10.
 A corporation sole is "one formed by the chief archbishop, bishop,

priest, minister, rabbi or other presiding elder of a religious
denomination, sect, or church, for the purpose of administering or
managing, as trustee, the affairs, properties and temporalities of such
religious denomination, sect or church." A corporation aggregate
formed for the same purpose, on the other hand, consists of two or
more persons.
May a corporation sole convert into a corporation aggregate by

mere amendment of its articles of incorporation?
Yes. Section 109 of the Corporation Code allows the application to

religious corporations of the general provisions governing non-stock
corporations.
For non-stock corporations, the power to amend its articles of

incorporation lies in its members. The code requires two-thirds of their
votes for the approval of such an amendment. So how will this
P a g e | 134
requirement apply to a corporation sole that has technically but one
member (the head of the religious organization) who holds in his hands
its broad corporate powers over the properties, rights, and interests of
his religious organization?
Although a non-stock corporation has a personality that is distinct from

those of its members who established it, its articles of incorporation
cannot be amended solely through the action of its board of trustees.
The amendment needs the concurrence of at least two-thirds of its
membership. If such approval mechanism is made to operate in a
corporation sole, its one member in whom all the powers of the
corporation technically belongs, needs to get the concurrence of two-
thirds of its membership. The one member, here the General
Superintendent, is but a trustee, according to Section 110 of the
Corporation Code, of its membership.
 Ecclesiastical – members are spiritual persons

 Lay – non-ecclesiastical corporations
 Foreign corporations are further classified into (1) resident foreign

corporations and (2) non-resident foreign corporations.
A resident foreign corporation is a foreign corporation engaged in trade

or business within the Philippines or having an office or place of
business therein while a non-resident foreign corporation is a foreign
corporation not engaged in trade or business within the Philippines and
not having any office or place of business therein.
 De Jure – corporation formed with all requirements of law

 De Facto – defectively formed from a bona fide attempt to
incorporate under existing laws and which exercises corporate powers
 Can there be a municipal corporation de facto?
No. An unconstitutional act is not a law; it confers no rights; it imposes

no duties; it affords no protection; it creates no office; it is, in legal
contemplation, as inoperative as though it had never been passed."
 Corporation by estoppel is founded on principles of equity and is

designed to prevent injustice and unfairness. It applies when persons
assume to form a corporation and exercise corporate functions and
enter into business relations with third persons. Where there is no
third person involved and the conflict arises only among those
assuming the form of a corporation, who therefore know that it has
not been registered there is no corporation by estoppel.
Reynaldo M. Lozano vs. Eliezer R. De Los Santos, (G.R. No.

125221, June 19, 1997); Lim Tong Lim vs. Phil. Fishing Gear
Industries, (G.R. No. 136448, November 3, 1999); Merrill Lynch
P a g e | 135
Futures, Inc. vs. Court of Appeals (G.R. No. 97816, July 24, 1992):
People of the Phil. vs. Patricio Botero, (G.R. No. 117010, April 18,
1997)
Nationality of Corporations
 DOMICILLIARY TEST - The nationality of a private corporation is

determined by the character and citizenship of its controlling
stockholders.
7. GRANDFATHER RULE - In case of an individual, percentage of

foreign owned voting stocks shall be determined by citizenship of the
individual stockholders.
In case of corporations, citizenship of corporation shall follow

citizenship of the controlling stockholders, irrespective of the place of
incorporation. Controlling stockholders mean those who hold more
than 50% of the voting stock.
Separate juridical personality
 As a general rule, a corporation will be deemed a separate legal

entity until sufficient reason to the contrary appears. But the rule is not
absolute. A corporation's separate and distinct legal personality may be
disregarded and the veil of corporate fiction pierced when the notion of
legal entity is used to defeat public convenience, justify wrong, protect
fraud, or defend crime.
Siain Enterprises vs. Cupertino Realty Corp., et al., (G.R. No.

170782, June 22, 2009)
8. It is elementary that a corporation has a personality distinct and

separate from its individual stockholders or members. Being an officer
or stockholder of a corporation does not make one's property the
property also of the corporation, for they are separate entities.
Adelio Cruz vs. Quiterio Dalisay, (A.M. No. R-181-P, July 31, 1987);
Traders Royal Bank vs. Court of Appeals, (G.R. No. 78412,
September 26, 1989)
 While a share of stock represents a proportionate or aliquot interest

in the property of the corporation, it does not vest the owner thereof
with any legal right or title to any of the property, his interest in the
corporate property being equitable or beneficial in nature. Shareholders
are in no legal sense the owners of corporate property, which is owned
by the corporation as a distinct legal person.
P a g e | 136
Concepcion Magsaysay-Labrador vs. Court of Appeals, (G.R. No.
58168, December 19, 1989); Good Earth Emporium, Inc. vs. Court
of Appeals, (G.R. No. 82797, February 27, 1991)
 A corporation — being an artificial person which has no feelings,

emotions or senses, and which cannot experience physical suffering or
metal anguish — is not entitled to moral damages.
Solid Homes, Inc. vs. Court of Appeals, (G.R. No. 117501, July 8,
1997)
 The Supreme Court laid down the test in determining the

applicability of the doctrine of piercing the veil of corporate fiction, to
wit:
1. Control, not mere majority or complete control, but complete

domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its
own.
2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal
duty, or dishonest and, unjust act in contravention of plaintiff’s legal
rights; and,
3. The aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.
Concept Builders, Inc. v. NLRC, (G.R. No. 108734, May 29, 1996);
"G" Holdings, Inc. vs. NAMAWU, et al., (G.R. No. 160236, October
16, 2009)
 The term "capital" and other terms used to describe the capital
structure of a corporation are of universal acceptance, and their usages
have long been established in jurisprudence. Briefly, capital refers to
the value of the property or assets of a corporation.
 The term "capital" in Section 11, Article XII of the 1987

Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to common
shares, and not to the total outstanding capital stock (common and non-
voting preferred shares. Gamboa vs. Teves (2011)
 Voting rights are exercised during regular or special meetings of

stockholders; regular meetings to be held annually on a fixed date,
while special meetings may be held at any time necessary or as
provided in the by-laws, upon due notice. The Corporation Code
provides for a whole range of matters which can be voted upon by
P a g e | 137
stockholders, including a limited set on which even non-voting
stockholders are entitled to vote on. On any of these matters which may
be voted upon by stockholders, the proxy device is generally available.
GSIS vs. Court of Appeals, et al., (G.R. Nos. 183905 & 184275, April
16, 2009)
 A preferred share of stock is one which entitles the holder thereof

to certain preferences over the holders of common stock. The
preferences are designed to induce persons to subscribe for shares of a
corporation. Preferred shares take a multiplicity of forms. The most
common forms may be classified into two: (1) preferred shares as to
assets; and (2) preferred shares as to dividends. The former is a share
which gives the holder thereof preference in the distribution of the
assets of the corporation in case of liquidation; the latter is a share the
holder of which is entitled to receive dividends on said share to the
extent agreed upon before any dividends at all are paid to the holders of
common stock. There is no guaranty, however, that the share will
receive any dividends.
Republic Planters Bank vs. Enrique A. Agana, Sr., (G.R. No. 51765,
March 3, 199)7
 The advantages accorded to the preferred shares are undeniable,

namely: the significant premium in the price being offered; the
preference enjoyed in the dividends as well as in the liquidation of
assets; and the voting rights still retained by preferred shares in major
corporate actions. All things considered, conversion to preferred shares
would best serve the interests and rights of the government or the
eventual owner of the CIIF SMC shares.
COCOFED, et al. vs. Republic of the Phil., (G.R. Nos. 177857-58,

September 17, 2009)
 Redeemable shares are shares usually preferred, which by their

terms are redeemable at a fixed date, or at the option of either issuing
corporation, or the stockholder, or both at a certain redemption price. A
redemption by the corporation of its stock is, in a sense, a repurchase of
it for cancellation. The present Code allows redemption of shares even
if there are no unrestricted retained earnings on the books of the
corporation. This is a new provision which in effect qualifies the
general rule that the corporation cannot purchase its own shares except
out of current retained earnings. However, while redeemable shares
may be redeemed regardless of the existence of unrestricted retained
earnings, this is subject to the condition that the corporation has, after
such redemption, assets in its books to cover debts and liabilities
inclusive of capital stock. Redemption, therefore, may not be made
where the corporation is insolvent or if such redemption will cause
P a g e | 138
insolvency or inability of the corporation to meet its debts as they
mature.
Republic Planters Bank vs. Enrique A. Agana, (Sr., G.R. No. 51765,
March 3, 1997)
 Treasury shares - stocks issued and fully paid for and re-acquired
by the corporation either by purchase, donation, forfeiture or other
means. Treasury shares are therefore issued shares but being in the
treasury they do not have the status of outstanding shares.
Consequently, although a treasury share, not having been retired by the
corporation re-acquiring it, may be re-issued or sold again, such share,
as long as it is held by the corporation as a treasury share, participates
neither in dividends, because dividends cannot be declared by the
corporation to itself, nor in the meetings of the corporation as voting
stock, for otherwise equal distribution of voting powers among
stockholders will be effectively lost and the directors will be able to
perpetuate their control of the corporation, though it still foregoing
essential features of a treasury stock are lacking in the questioned
shares .
SAN MIGUEL CORPORATION, NEPTUNIA CORPORATION

LIMITED, ANDRES SORIANO III AND ANSCOR-HAGEDORN
SECURITIES, INC., petitioners, vs. Sandiganbayan (G.R. Nos.
104637-38. September 14, 2000.)
 The charter of a corporation is a contract between three parties: (a)

It is a contract between the state and the corporation to which the
charter is granted; (b) it is a contract between the stockholders and the
state and (c) it is also a contract between the corporation and its
stockholders. (Cook on Corporations, vol. 2, sec. 494 and cases cited.)
Government of the Phil. vs. Manila Railroad Company, (G.R. No.

30646, January 30, 1929)
 Sec. 17 - Grounds When Articles of Incorporation or Amendment

May Be Rejected or Disapproved
The amendment of the articles of incorporation requires merely that (a)

the amendment is not contrary to any provision or requirement under
the Corporation Code, and that (b) it is for a legitimate purpose.
IEMELIF, et al. vs. Nathanael Lazaro, et al., (G.R. No. 184088, July
6, 2010)
 Parties organizing a corporation must choose a name at their peril;

and the use of a name similar to one adopted by another corporation,
whether a business or a nonprofit organization, if misleading or likely
P a g e | 139
to injure in the exercise of its corporate functions, regardless of intent,
may be prevented by the corporation having a prior right, by a suit for
injunction against the new corporation to prevent the use of the name.
Ang Mga Kaanib Sa Iglesia Ng Dios Kay Kristo Hesus vs. Iglesia
Ng Dios Kay Cristo Jesus, (G.R. No. 137592, December 12, 2001)
 The corporation, upon such change in its name, is in no sense a new

corporation, nor the successor of the original corporation. It is the same
corporation with a different name, and its character is in no respect
changed. A change in the corporate name does not make a new
corporation, and whether effected by special act or under a general law,
has no effect on the identity of the corporation, or on its property,
rights, or liabilities. The corporation continues, as before, responsible
in its new name for all debts or other liabilities which it had previously
contracted or incurred.
Republic Planters Bank vs. Court of Appeals, (G.R. No. 93073,

December 21, 1992)
 Organization and commencement of transaction of corporate

business are but conditions subsequent and not prerequisites for
acquisition of corporate personality. The adoption and filing of by-laws
is also a condition subsequent. Under Section 19 of the Corporation
Code, a corporation commences its corporate existence and
juridical personality and is deemed incorporated from the date the
Securities and Exchange Commission issues certificate of
incorporation under its official seal. This may be done even before
the filing of the by-laws, which under Section 46 of the Corporation
Code, must be adopted "within one month after receipt of official
notice of the issuance of its certificate of incorporation."
Chung Ka Bio vs. Intermediate Appellate Court, (G.R. No. L-

71837, July 26, 1988)
 The word "term" has acquired a definite meaning in jurisprudence.

In several cases, we have defined "term" as the time during which the
officer may claim to hold the office as of right and fixes the interval
after which the several incumbents shall succeed one another. The term
of office is not affected by the holdover. The term is fixed by statute
and it does not change simply because the office may have become
vacant, nor because the incumbent holds over in office beyond the end
of the term due to the fact that a successor has not been elected and has
failed to qualify.
Term is distinguished from tenure in that an officer's "tenure"

represents the term during which the incumbent actually holds office.
P a g e | 140
The tenure may be shorter (or, in case of holdover, longer) than the
term for reasons within or beyond the power of the incumbent.
Valle Verde Country Club, Inc., et al. vs. Victor Africa, (G.R. No.
151969, September 4, 2009)
 The term of the members of the board of directors shall be only for
one year; their term expires one year after election to the office. The
holdover period — that time from the lapse of one year from a
member's election to the Board and until his successor's election and
qualification — is not part of the director's original term of office, nor
is it a new term; the holdover period, however, constitutes part of his
tenure. Corollary, when an incumbent member of the board of directors
continues to serve in a holdover capacity, it implies that the office has a
fixed term, which has expired, and the incumbent is holding the
succeeding term.
151969, September 4, 2009)
 As a general rule, officers and directors of a corporation hold over

after the expiration of their terms until such time as their successors are
elected or appointed.
The holdover doctrine has, to be sure, a purpose which is at once legal

as it is practical. It accords validity to what would otherwise be deemed
as dubious corporate acts and gives continuity to a corporate enterprise
in its relation to outsiders.
Hans Christian M. Señeres vs. COMELEC, et al., (G.R. No.

178678, April 16, 2009)
 The power and the responsibility to decide whether the corporation

should enter into a contract that will bind the corporation are lodged in
the board of directors, subject to the articles of incorporation, by-laws,
or relevant provisions of law. However, just as a natural person may
authorize another to do certain acts for and on his behalf, the board of
directors may validly delegate some of its functions and powers to
officers, committees or agents. The authority of such individuals to
bind the corporation is generally derived from law, corporate by-laws
or authorization from the board, either expressly or impliedly by habit,
custom or acquiescence in the general course of business.
Cebu Mactan Members Center, Inc. vs. Masahiro Tsukahara,

(G.R. No. 159624, July 17, 2009)
 A corporation, like a natural person who may authorize another to

do certain acts for and in his behalf, through its board of directors, may
P a g e | 141
legally delegate some of its functions and powers to its officers,
committees or agents appointed by it. In the absence of an authority
from the board of directors, no person, not even the officers of the
corporation, can validly bind the corporation.
Luzviminda Visayan vs. NLRC, (G.R. No. 69999, April 30, 1991)
 Under Section 23 of the Corporation Code of the Philippines,

authority over corporate funds is exercised by the Board of Directors
who, in the absence of an appropriate delegation of authority, are the
only ones who can act for and in behalf of the corporation.
People's Broadcasting (Bombo Radyo Phils., Inc.) vs. Secretary of

the DOLE, et al., (G.R. No. 179652, May 8, 2009)
 It must be borne in mind that Sec. 23, in relation to Sec. 25 of the

Corporation Code, clearly enunciates that all corporate powers are
exercised, all business conducted, and all properties controlled by the
board of directors. A corporation has a separate and distinct personality
from its directors and officers and can only exercise its corporate
powers through the board of directors. Thus, it is clear that an
individual corporate officer cannot solely exercise any corporate power
pertaining to the corporation without authority from the board of
directors. This has been our constant holding in cases instituted by a
corporation.
Cagayan Valley Drug Corp. vs. Commissioner of Internal Revenue,

(G.R. No. 151413, February 13, 2008)
Business Judgment Rule
 the SEC and the courts are barred from intruding into business
judgments of corporations, when the same are made in good faith. The
said rule precludes the reversal of the decision of the PSE to deny
PALI's listing application, absent a showing of bad faith on the part of
the PSE
Philippine Stock Exchange, Inc. vs. Court of Appeals, (G.R. No.

125469, October 27, 1997)
Doctrine of apparent authority
 The authority of a corporate officer in dealing with third persons

may be actual or apparent. The doctrine of "apparent authority," with
special reference to banks, was laid out in Prudential Bank vs. Court of
Appeals, G.R. No. 108957, June 14, 1993, where it was held that:
"Conformably, we have declared in countless decisions that the
principal is liable for obligations contracted by the agent. The agent's
P a g e | 142
apparent representation yields to the principal's true representation and
the contract is considered as entered into between the principal and the
third person (citing National Food Authority vs. Intermediate Appellate
Court, G.R. No. 75640, April 5, 1990).”
First Philippine International Bank vs. Court of Appeals, (G.R. No.

115849, January 24, 1996)
 Apparent authority is derived not merely from practice. Its existence

may be ascertained through (1) the general manner in which the
corporation holds out an officer or agent as having the power to act or,
in other words, the apparent authority to act in general, with which it
clothes him; or (2) the acquiescence in his acts of a particular nature,
with actual or constructive knowledge thereof, whether within or
beyond the scope of his ordinary powers. It requires presentation of
evidence of similar act(s) executed either in its favor or in favor of
other parties. It is not the quantity of similar acts which establishes
apparent authority, but the vesting of a corporate officer with the power
to bind the corporation.
People's Aircargo and Warehousing Co. Inc. vs. Court of Appeals,

(G.R. No. 117847, October 7, 1998); Inter-Asia Investments
Industries, Inc. vs. Court of Appeals, (G.R. No. 125778, June 10,
2003)
 Whatever authority the officers or agents of a corporation may have

is derived from the board of directors or other governing body, unless
conferred by the charter of the corporation. A corporate officer's power
as an agent of the corporation must therefore be sought from the
statute, the charter, the by-laws, or in a delegation of authority to such
officer, from the acts of the board of directors, formally expressed or
implied from a habit or custom of doing business.
Ignacio Vicente vs Ambrosio M. Geraldez, (G.R. No. L-32473, July

31, 1973)
 The board of directors of a corporation is a creation of the

stockholders. The board of directors, or the majority thereof, controls
and directs the affairs of the corporation; but in drawing to itself the
power of the corporation, it occupies a position of trusteeship in
relation to the minority of the stock. The board shall exercise good
faith, care, and diligence in the administration of the affairs of the
corporation and protect not only the interest of the majority but also
that of the minority of the stock. Where the majority of the board of
directors wastes or dissipates the funds of the corporation or
fraudulently disposes of its properties, or performs ultra vires acts, the
court, in the exercise of its equity jurisdiction, and upon showing that
intracorporate remedy is unavailing, will entertain a suit filed by the
P a g e | 143
minority members of the board of directors, for and in behalf of the
corporation, to prevent waste and dissipation and the commission of
illegal acts and otherwise redress the injuries of the minority
stockholders against the wrongdoing of the majority. The action in such
a case is said to be brought derivatively in behalf of the corporation to
protect the rights of the minority stockholders thereof.
Santiago Cua, Jr., et al. vs. Miguel Ocampo Tan, et al., (G.R. Nos.
181455-56 & 182008, December 4, 2009)
 Theory of Specific Capacity - the corporation cannot exercise

powers except those expressly/impliedly given.
 Theory of General Capacity - a corporation is said to hold such

powers as are not prohibited/withheld from it by general law
Derivative Suit
 It is well settled in this jurisdiction that where corporate directors

are guilty of a breach of trust — not of mere error of judgment or abuse
of discretion — and intracorporate remedy is futile or useless, a
stockholder may institute a suit in behalf of himself and other
stockholders and for the benefit of the corporation, to bring about
a redress of the wrong inflicted directly upon the corporation and
indirectly upon the stockholders.
181455-56 & 182008, December 4, 2009)
DERIVATI INDIVIDU CLASS

VE AL SUIT SUITS
Where the Where a Where the
acts stockholder wrong is done
complained or member is to a group of
of constitute denied the stockholders,
a wrong to right of as where
the inspection, preferred
corporation his suit stockholders'
itself, the would be rights are
cause of individual violated, a
action because the class or
belongs to wrong is representative
the done to him suit will be
corporation personally proper for the
and not to and not to protection of
the the other all stockholders
individual stockholders belonging to
stockholder or the the same
P a g e | 144
or member. corporation. group.
Although in
most every
case of
wrong to the
corporation,
each
stockholder
is necessarily
affected
because the
value of his
interest
therein
would be
impaired,
this fact of
itself is not
sufficient to
give him an
individual
cause of
action since
the
corporation
is a person
distinct and
separate
from him
and can and
should itself
sue the
wrongdoer.
 In cases of mismanagement where the wrongful acts are committed
by the directors or trustees themselves, a stockholder or member may
find that he has no redress because the former are vested by law with
the right to decide whether or not the corporation should sue, and they
will never be willing to sue themselves. The corporation would thus be
helpless to seek remedy. Because of the frequent occurrence of such a
situation, the common law gradually recognized the right of a
stockholder to sue on behalf of a corporation in what eventually
became known as a "derivative suit." It has been proven to be an
effective remedy of the minority against the abuses of management.
Thus, an individual stockholder is permitted to institute a derivative
suit on behalf of the corporation wherein he holds stock in order to
protect or vindicate corporate rights, whenever officials of the
corporation refuse to sue or are the ones to be sued or hold the control
of the corporation. In such actions, the suing stockholder is regarded as
the nominal party, with the corporation as the party in interest.
 The power and the responsibility to decide whether the corporation

should enter into a contract that will bind the corporation are lodged in
the board, subject to the articles of incorporation, bylaws, or relevant
provisions of law. In the absence of authority from the board of
directors, no person, not even its officers, can validly bind a
corporation. However, just as a natural person may authorize another to
do certain acts for and on his behalf, the board of directors may validly
delegate some of its functions and powers to its officers, committees or
agents. The authority of these individuals to bind the corporation is
generally derived from law, corporate bylaws or authorization from the
board, either expressly or impliedly by habit, custom or acquiescence
in the general course of business.
Violeta Tudtud Banate, et al. vs. Phil. Countryside Rural Bank

(Liloan, Cebu), Inc., et al., (G.R. No. 163825, July 13, 2010)
 the distinction between "proxy solicitation" and "proxy validation"

cannot be dismissed offhand. The right of a stockholder to vote by
proxy is generally established by the Corporation Code, but it is the
Securities Regulation Code which specifically regulates the form and
use of proxies, more particularly the procedure of proxy solicitation,
primarily through Section 20.
16, 2009)
 Under Section 5 (c) of Presidential Decree No. 902-A, in relation to

the SRC, the jurisdiction of the regular trial courts with respect to
election-related controversies is specifically confined to "controversies
in the election or appointment of directors, trustees, officers or
managers of corporations, partnerships, or associations". Evidently, the
jurisdiction of the regular courts over so-called election contests or
controversies under Section 5 (c) does not extend to every potential
subject that may be voted on by shareholders, but only to the election
of directors or trustees, in which stockholders are authorized to
participate under Section 24 of the Corporation Code.
16, 2009)
 The underlying policy of the Corporation Code is that the business

and affairs of a corporation must be governed by a board of directors
whose members have stood for election, and who have actually been
elected by the stockholders, on an annual basis. Only in that way can
the directors' continued accountability to shareholders, and the
legitimacy of their decisions that bind the corporation's stockholders,
be assured. The shareholder vote is critical to the theory that
legitimizes the exercise of power by the directors or officers over
properties that they do not own.
 This theory of delegated power of the board of directors similarly

explains why, under Section 29 of the Corporation Code, in cases
where the vacancy in the corporation's board of directors is caused not
by the expiration of a member's term, the successor "so elected to fill in
a vacancy shall be elected only for the unexpired term of his
predecessor in office". The law has authorized the remaining members
of the board to fill in a vacancy only in specified instances, so as not to
retard or impair the corporation's operations; yet, in recognition of the
stockholders' right to elect the members of the board, it limited the
period during which the successor shall serve only to the "unexpired
term of his predecessor in office".
151969, September 4, 2009)
 It also bears noting that the vacancy referred to in Section 29

contemplates a vacancy occurring within the director's term of office.
When a vacancy is created by the expiration of a term, logically, there
is no more unexpired term to speak of. Hence, Section 29 declares that
it shall be the corporation's stockholders who shall possess the
authority to fill in a vacancy caused by the expiration of a member's
term.
151969, September 4, 2009)
Doctrine of corporate opportunity
 Section 31 lays down the "doctrine of corporate opportunity" and

holds personally liable corporate directors found guilty of gross
negligence or bad faith in directing the affairs of the corporation, which
results in damage or injury to the corporation, its stockholders or
members, and other persons.
Manuel Luis S. Sanchez vs. Republic of the Phil., (G.R. No. 172885,
October 9, 2009)
 The personal liability of corporate officers validly attaches only

when (a) they assent to a patently unlawful act of the corporation; or
(b) they are guilty of bad faith or gross negligence in directing its
affairs; or (c) they incur conflict of interest, resulting in damages to the
corporation, its stockholders or other persons.
H.L. Carlos Construction, Inc. vs. Marina Properties Corp., et al.,

(G.R. No. 147614, January 29, 2004)
 The general rule is that obligations incurred by the corporation,

acting through its directors, officers, and employees, are its sole
liabilities. However, solidary liability may be incurred, but only under
the following exceptional circumstances: (1) When directors and
trustees or, in appropriate cases, the officers of a corporation: (a) vote
for or assent to patently unlawful acts of the corporation; (b) act in bad
faith or with gross negligence in directing the corporate affairs; (c) are
guilty of conflict of interest to the prejudice of the corporation, its
stockholders or members, and other persons; (2) When a director or
officer has consented to the issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with the corporate secretary
his written objection thereto; (3) When a director, trustee or officer has
contractually agreed or stipulated to hold himself personally and
solidarily liable with the corporation; or (4) When a director, trustee or
officer is made, by specific provision of law, personally liable for his
corporate action.
Andrea Uy, et al. vs. Arlene Villanueva, et al., G.R. No. 157851,
June 29, 2007; Shrimp Specialists, Inc. vs. Fuji-Triumph Agri-
Industrial Corp., (G.R. Nos. 168756 & 171476, December 7, 2009)
 Section 31 makes a director personally liable for corporate debts if

he willfully and knowingly votes for or assents to patently unlawful
acts of the corporation. Section 31 also makes a director personally
liable if he is guilty of gross negligence or bad faith in directing the
affairs of the corporation. The bad faith or wrongdoing of the director
must be established clearly and convincingly. Bad faith is never
presumed.
Seaoil Petroleum Corp. vs. Autocorp Group, et al., (G.R. No.

164326, October 17, 2008)
 The general rule is that obligations incurred by the corporation,
acting through its directors, officers, and employees, are its sole
liabilities. However, solidary liability may be incurred, but only under
the following exceptional circumstances:
1. When directors and trustees or, in appropriate cases, the officers of a

corporation: (a) vote for or assent to patently unlawful acts of the
corporation; (b) act in bad faith or with gross negligence in directing
the corporate affairs; (c) are guilty of conflict of interest to the
prejudice of the corporation, its stockholders or members, and other
persons;
2. When a director or officer has consented to the issuance of watered
stocks or who, having knowledge thereof, did not forthwith file with
the corporate secretary his written objection thereto;
3. When a director, trustee or officer has contractually agreed or
stipulated to hold himself personally and solidarily liable with the
corporation; or
4. When a director, trustee or officer is made, by specific provision of
law, personally liable for his corporate action.
Shrimp Specialists, Inc. vs. Fuji-Triumph Agri-Industrial Corp.,

(G.R. Nos. 168756 & 171476, December 7, 2009)
 The mere interlocking of directors and officers does not warrant

piercing the separate corporate personalities of the two corporations.
Not only must there be a showing that there was majority or complete
control, but complete domination, not only of finances but of policy
and business practice in respect to the transaction attacked, so that the
corporate entity as to this transaction had at the time no separate mind,
will or existence of its own.
"G" Holdings, Inc. vs. NAMAWU, et al., (G.R. No. 160236, October
16, 2009)
 To validly increase its authorized capital stock, corporation must

issue at least 25% of such stock.
 The corporation must issue at least twenty-five percent (25%) of the

newly or contemporaneously authorized capital stock in the course of
complying with the requirements of the Corporation Code for
increasing its authorized capital stock.
Nestle Philippines, Inc. vs. CA and SEC, (G.R. No. 86738, November
13, 1991)
 The grant of preemptive rights preserves the proportionate shares

of the original partners so as not to dilute their respective interests with
the issuance of the new shares. Unlike the right of first refusal, a
preemptive right gives a partner a preferential right over the newly
issued shares only to the extent that it retains its original proportionate
share in the joint venture.
 Notice Requirement
 To give the stockholders knowledge of the intended sale of shares of

stock of the corporation, in order that they may exercise their
preemptive right.
 While the Corporation Code allows the transfer of all or

substantially all the properties and assets of a corporation, the transfer
should not prejudice the creditors of the assignor. The only way the
transfer can proceed without prejudice to the creditors is to hold the
assignee liable for the obligations of the assignor. The acquisition by
the assignee of all or substantially all of the assets of the assignor
necessarily includes the assumption of the assignor's liabilities, unless
the creditors who did not consent to the transfer choose to rescind the
transfer on the ground of fraud. To allow an assignor to transfer all its
business, properties and assets without the consent of its creditors and
without requiring the assignee to assume the assignor's obligations will
defraud the creditors. The assignment will place the assignor's assets
beyond the reach of its creditors.
Strategic Alliance Development Corp. vs. Radstock Securities

Limited, et al., (G.R. Nos. 178158 & 180428, December 4, 2009)
 The requirement of unrestricted retained earnings to cover the

shares is based on the trust fund doctrine which means that the capital
stock, property and other assets of a corporation are regarded as equity
in trust for the payment of corporate creditors. The reason is that
creditors of a corporation are preferred over the stockholders in the
distribution of corporate assets. There can be no distribution of assets
among the stockholders without first paying corporate creditors. Hence,
any disposition of corporate funds to the prejudice of creditors is null
and void.
Boman Environmental Development Corporation vs. Court of

Appeals, (G.R. No. 77860, November 22, 1988)
TRUST FUND DOCTRINE
 Is a "rule that the property of a corporation is a trust fund for the

payment of creditors, but such property can be called a trust fund 'only
by way of analogy or metaphor.' As between the corporation itself and
its creditors it is a simple debtor, and as between its creditors and
stockholders its assets are in equity a fund for the payment of its debts"
 The "Trust Fund" doctrine considers this subscribed capital as a
trust fund for the payment of the debts of the corporation, to which the
creditors may look for satisfaction. Until the liquidation of the
corporation, no part of the subscribed capital may be returned or
released to the stockholder (except in the redemption of redeemable
shares) without violating this principle. Thus, dividends must never
impair the subscribed capital; subscription commitments cannot be
condoned or remitted; nor can the corporation buy its own shares using
the subscribed capital as the consideration therefor.
 Under the trust fund doctrine, a corporation has no legal capacity

to release an original subscriber to its capital stock from the
obligation of paying for his shares, in whole or in part, without a
valuable consideration, or fraudulently, to the prejudice of
creditors. The creditor is allowed to maintain an action upon any
unpaid subscriptions and thereby steps into the shoes of the corporation
for the satisfaction of its debt. To make out a prima facie case in a suit
against stockholders of an insolvent corporation to compel them to
contribute to the payment of its debts by making good unpaid balances
upon their subscriptions, it is only necessary to establish that the
stockholders have not in good faith paid the par value of the stocks of
the corporation.
Donnina C. Halley vs. Printwell, Inc., (G.R. No. 157549, May 30,
2011)
ULTRA VIRES ACTS
 In legal parlance, "ultra vires" act refers to one which is not within
the corporate powers conferred by the Corporation Code or articles of
incorporation or not necessary or incidental in the exercise of the
powers so conferred.
Lopez Realty, Inc. vs. Florentina Fontecha, (G.R. No. 76801, August
11, 1995)
 A distinction should be made between corporate acts or contracts

which are illegal and those which are merely ultra vires. The former
contemplates the doing of an act which is contrary to law, morals, or
public order, or contravene some rules of public policy or public duty,
and are, like similar transactions between individuals, void. They
cannot serve as basis of a court action, nor acquire validity by
performance, ratification, or estoppel. Mere ultra vires acts, on the
other hand, or those which are not illegal and void ab initio, but are not
merely within the scope of the articles of incorporation, are merely
voidable and may become binding and enforceable when ratified by the
stockholders.
Maria Carla Pirovano vs. The De La Rama Steamship Co., (G.R.

No. L-5377, December 29, 1954)
BY LAWS
 Non-filing of by-laws will not automatically dissolve the

corporation.
 With the adoption of PD 902-A, it is now clear that the failure to file
by-laws within the required period is only a ground for suspension or
revocation of the certificate of registration of corporations. Non-filing
of the by-laws will not result in automatic dissolution of the
corporation.
Chung Ka Bio vs. Intermediate Appellate Court, (G.R. No. L-

71837, July 26, 1988)
VOTING TRUST AGREEMENTS
 A voting trust agreement may confer upon a trustee not only the
stockholder's voting rights but also other rights pertaining to his shares
as long as the voting trust agreement is not entered "for the purpose of
circumventing the law against monopolies and illegal combinations in
restraint of trade or used for purposes of fraud." Thus, the traditional
concept of a voting trust agreement primarily intended to single out a
stockholder's right to vote from his other rights as such and made
irrevocable for a limited duration may in practice become a legal
device whereby a transfer of the stockholders’ shares is effected subject
to the specific provision of the voting trust agreement. The execution of
a voting trust agreement, therefore, may create a dichotomy between
the equitable or beneficial ownership of the corporate shares of a
stockholder, on the one hand, and the legal title thereto on the other
hand.
Ramon C. Lee vs. Court of Appeals, (G.R. No. 93695, February 4,

1992)
STOCK TRANSFERS
 The only limitation imposed by Section 63 of the Corporation Code

is when the corporation holds any unpaid claim against the shares
intended to be transferred.
 A corporation, either by its board, its by-laws, or the act of its

officers, cannot create restrictions in stock transfers, because: ". . .
restrictions in the traffic of stock must have their source in legislative
enactment, as the corporation itself cannot create such impediment. By-
laws are intended merely for the protection of the corporation, and
prescribe regulation, not restriction; they are always subject to the
charter of the corporation. The corporation, in the absence of such
power, cannot ordinarily inquire into or pass upon the legality of the
transactions by which its stock passes from one person to another, nor
can it question the consideration upon which a sale is based..."
 The right of a transferee/assignee to have stocks transferred to his

name is an inherent right flowing from his ownership of the stocks.
Thus: "whenever a corporation refuses to transfer and register stock in
cases like the present, mandamus will lie to compel the officers of the
corporation to transfer said stock in the books of the corporation." The
corporation's obligation to register is ministerial.
Rural Bank of Salinas, Inc. vs. Court of Appeals, (G.R. No. 96674,
June 26, 1992); Eric L. Lee vs. Henry J. Trocino, et al., (G.R. No.
164648, June 19, 2009)
REGISTRATION IN BOOKS
 The corporation did not keep books and records. Perforce, no

transfer was ever recorded, much less effected as to prejudice third
parties. The transfer must be registered in the books of the corporation
to affect third persons.
Concepcion Magsaysay-Labrador vs. CA and Adelaida Rodriguez-
Magsaysay, (G.R. No. 58168, December 19, 1989)
RIGHT OF INSPECTION
 stockholder may exercise his statutory right of inspection, the only

express limitation being that (1) the right of inspection should be
exercised at reasonable hours on business days; (2) the person
demanding to examine and copy excerpts from the corporation's
records and minutes has not improperly used any information secured
through any previous examination of the records of such corporation;
and (3) the demand is made in good faith or for a legitimate purpose.
Rep. of the Phil. (PCGG) vs. Sandiganbayan, et al., (G.R. No.

88809, July 10, 1991); Victor Africa vs. PCGG, (G.R. No. 83831,
January 9, 1992); Ma. Belen Flordeliza C. Ang-Abaya, et al. vs.
Eduardo G. Ang, (G.R. No. 178511, December 4, 2008)
MERGER AND CONSOLIDATION
 Consolidation is the union of two or more existing entities to form a

new entity called the consolidated corporation.
 A merger, on the other hand, is a union whereby one or more

existing corporations are absorbed by another corporation that survives
and continues the combined business. The merger, however, does not
become effective upon the mere agreement of the constituent
corporations. Since a merger or consolidation involves fundamental
changes in the corporation, as well as in the rights of stockholders and
creditors, there must be an express provision of law authorizing them.
For a valid merger or consolidation, the approval by the Securities and

Exchange Commission (SEC) of the articles of merger or consolidation
is required. These articles must likewise be duly approved by a
majority of the respective stockholders of the constituent corporation
 The Corporation Code does not mandate the absorption of the

employees of the non-surviving corporation by the surviving
corporation in the case of a merger. The rule is that unless expressly
assumed, labor contracts such as employment contracts and collective
bargaining agreements are not enforceable against a transferee of an
enterprise, labor contracts being in personam, thus binding only
between the parties. A labor contract merely creates an action in
personam and does not create any real right which should be respected
by third parties. This conclusion draws its force from the right of an
employer to select his employees and to decide when to engage them as
protected under our Constitution, and the same can only be restricted
by law through the exercise of the police power.
BPI vs. BPI Employees Union-Davao Chapter-Federation of

Unions in BPI Unibank, (G.R. No. 164301, August 10, 2010), citing
Sundowner Development Corp. v. Drilon, (G.R. No. 82341,
December 6, 1989)
RIGHT OF APPRAISAL
 [Appraisal right] means that a stockholder who dissented and voted

against the proposed corporate action, may choose to get out of the
corporation by demanding payment of the fair market value of his
shares. When a person invests in the stocks of a corporation, he
subjects his investment to all the risks of the business and cannot just
pull out such investment should the business not come out as he
expected. He will have to wait until the corporation is finally dissolved
before he can get back his investment, and even then, only if sufficient
assets are left after paying all corporate creditors. His only way out
before dissolution is to sell his shares should he find a willing buyer. If
there is no buyer, then he has no recourse but to stay with the
corporation. However, in certain specified instances, the Code grants
the stockholder the right to get out of the corporation even before its
dissolution because there has been a major change in his contract of
investment with which he does not agree and which the law presumes
he did not foresee when he bought his shares. Since the will of two-
thirds of the stocks will have to prevail over his objections, the law
considers it only fair to allow him to get back his investment and
withdraw from the corporation.
181455-56 & 182008, December 4, 2009)
Definition; Rights Foreign Corporations
 To be doing or "transacting business in the Philippines" for purposes

of Section 133 of the Corporation Code, the foreign corporation must
actually transact business in the Philippines, that is, perform specific
business transactions within the Philippine territory on a continuing
basis in its own name and for its own account. Actual transaction of
business within the Philippine territory is an essential requisite for the
Philippines to acquire jurisdiction over a foreign corporation and thus
require the foreign corporation to secure a Philippine business license.
If a foreign corporation does not transact such kind of business in the
Philippines, even if it exports its products to the Philippines, the
Philippines has no jurisdiction to require such foreign corporation to
secure a Philippine business license.
B. Van Zuiden Bros., Ltd. vs. GTVL Mfg. Industries, Inc., (G.R.
No. 147905, May 28, 2007)
 A foreign corporation may sue in this jurisdiction for infringement

of trademark and unfair competition although it is not doing business in
the Philippines because the Philippines was a party to the Convention
of the Union of Paris for the Protection of Industrial Property.
Converse Rubber Corp. vs. Universal Rubber Products, Inc., (L-

27906, January 8, 1987)
 A foreign corporation not licensed to do business in the Philippines

is not absolutely incapacitated from filing a suit in local courts. Only
when that foreign corporation is "transacting" or "doing business" in
the country will a license be necessary before it can institute suits.
Aboitiz Shipping Corp. vs. Insurance Co. of North America, (G.R.

No. 168402, August 6, 2008)
 In the recent case of Ang-Abaya, et al. v. Ang, et al., the Court had
the occasion to enumerate the requisites before the penal provision
under Section 144 of the Corporation Code may be applied in a case of
violation of a stockholder or member's right to inspect the corporate
books/records as provided for under Section 74 of the Corporation
Code.
Requisites
1. A director, trustee, stockholder or member has made a prior demand

in writing for a copy of excerpts from the corporation's records or
minutes;
2. Any officer or agent of the concerned corporation shall refuse to
allow the said director, trustee, stockholder or member of the
corporation to examine and copy said excerpts;
3. If such refusal is made pursuant to a resolution or order of the board
of directors or trustees, the liability under this section for such action
shall be imposed upon the directors or trustees who voted for such
refusal; and,
4. Where the officer or agent of the corporation sets up the defense
that the person demanding to examine and copy excerpts from the
corporation's records and minutes has improperly used any information
secured through any prior examination of the records or minutes of
such corporation or of any other corporation, or was not acting in good
faith or for a legitimate purpose in making his demand, the contrary
must be shown or proved.
Sy Tiong Shiou, et al. vs. Sy Chim, et al., (G.R. Nos. 174168 &
179438, March 30, 2009)
 Section 145 of the Corporation Code clearly provides that "no right
or remedy in favor of or against any corporation, its stockholders,
members, directors, trustees, or officers, nor any liability incurred by
any such corporation, stockholders, members, directors, trustees, or
officers, shall be removed or impaired either by the subsequent
dissolution of said corporation." Even if no trustee is appointed or
designated during the three-year period of the liquidation of the
corporation, the Court has held that the board of directors may be
permitted to complete the corporate liquidation by continuing as
"trustees" by legal implication.
SUPPLEMENTAL NOTES AND QUESTIONS FOR

CORPORATION LAW
ON CORPORATION LAW
X is president of AB, a family owned corporation which defrauded Y

when they failed to deliver a motor vehicle which was admittedly
previously sold and delivered already to another person instead. X
and Y are cousins and it was thru the former’s representation that
the latter decided to buy the motor vehicle from AB. X now raises the
defense that he is not a party to the contract and there is no ground
to pierce the veil of corporate fiction.
There is ground to pierce the veil of corporate fiction.
The test in determining the applicability of the doctrine of piercing the

veil of corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and business
practice in respect to the transaction attacked so that the corporate
entity as to this transaction had at the time no separate mind, will or
existence of its own;
2. Such control must have been used by the defendant to commit

fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust acts in contravention of
plaintiffs’ legal rights; and
3. The aforesaid control and breach of duty must proximately cause

the injury or unjust loss complained of.
In a dispute involving the corporation and its stockholders, how

should the articles of incorporation and by-laws be appreciated and
construed?
In the case of Forest Hills Golf and Country Club, Inc., vs. Gardpro
(GR no.164686, October 22, 2014), the Supreme Court had emphasized
that the Articles of Incorporation defines the contractual relationship
between the corporation with its stockholders, the corporation and the
state, and the stockholders and the state. Hence, they are binding not
just on the corporation but also on the stockholders themselves. On the
other hand, the by-laws are considered to be the “private statutes” by
which the corporation is to be governed. In construing and applying the
provisions of the articles of incorporation and the by-laws of the
corporation therefore, the plain meaning or literal meaning rule
embodied in Article 1370 of the Civil Code shall apply.
May the directors of a corporation be compelled to participate in

arbitration proceedings, when they were not parties to the contract
that contained the arbitration clause?
In the case of Lanuza Jr., vs. BF Corporation (GR no.174938, October

1, 2014), the High Court stated that, while arbitration promotes the
parties’ autonomy in resolving their disputes, it also recognized the
decision made in Heirs of Augusto Salas Jr., vs. Laperal Realty
Corporation (378 Phil.Reports 369) that, an arbitration clause shall not
apply to persons who were neither parties to the contract nor assignees
of previous parties.
In Lanuza, the Court therefore ruled that, “As a general rule, a

corporation’s representative who did not personally bind himself or
herself to an arbitration agreement cannot be forced to participate in
arbitration proceedings made pursuant to an agreement entered into by
the corporation. He or she is not a party to that agreement.” This rule is
consistent as well with the separate and juridical personality of juridical
persons vis-à-vis, their directors, officers, stockholders and agents.
The ruling in Lanuza however should be considered as an application

of the general rule, except of course when there are ground to pierce the
veil of corporate fiction.
Can the doctrine of piercing the veil of corporate fiction be used to

establish or acquire jurisdiction over a corporation?
No. This is so because the doctrine of piercing the veil of corporate

fiction comes to play only during the trial of the case after the court has
already acquired jurisdiction over the corporation. Hence, before this
doctrine can be applied, based on the evidence presented, it is
imperative that the court must first have jurisdiction over the
corporation.
The implication of the above comment is twofold: (1) the court must
first acquire jurisdiction over the corporation or corporations involved
before its or their separate personalities are disregarded; and (2) the
doctrine of piercing the veil of corporate entity can only be raised
during a full-blown trial over a cause of action duly commenced
involving parties duly brought under the authority of the court by way
of service of summons or what passes as such service. (Kukan
International vs. J.Amor Reyes [2010])
Is the paid-up capital of a corporation a reflection of its financial
capacity to meet its recurrent and long-term obligations?
No. Paid-up capital is merely seed money to start a corporation or a

business entity. Paid-up capitalization of PhP 5,000 is not and should
not be taken as a reflection of the firm’s capacity to meet its recurrent
and long-term obligations. It must be borne in mind that the equity
portion cannot be equated to the viability of a business concern, for the
best test is the working capital which consists of the liquid assets of a
given business relating to the nature of the business concern.
Neither should the level of paid-up capital of Kukan, Inc. upon its
incorporation be viewed as a badge of fraud, for it is in compliance
with Sec. 13 of the Corporation Code, which only requires a minimum
paid-up capital of PhP 5,000.
May minority stockholders file their derivative suit against the

corporation’s board of directors for acts of mismanagement?
In Ching vs. Subic Bay Golf and Country Club, Inc., (GR no.174353,
September 10, 2014), the High Court ruled that a stockholders’ right to
institute a derivative suit is not based on any express provision of the
Corporation Code or even the Securities Regulation Code, but is
impliedly recognized when the said laws make corporate directors or
officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties.
The following are the elements of a derivative suit, which must all
concur:
1. He was a stockholder or a member at the time the acts or transactions

subject of the action occurred and at the time the action was filed;
2. He exerted all reasonable efforts and alleges the same with particularity
in the complaint, to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or
partnership to obtain the relief he desires;
3. No appraisal rights are available for the act or acts complained of;
4. The suit is not a nuisance or harassment suit.
In corporate rehabilitation proceedings, whose rights shall prevail
over the other?
This was the issue that the Supreme Court had to confront with in the
case of Aquino vs. Pacific Plans, Inc., (GR no.193108, December 10,
2014) involving the plan holders and other creditors of pre-need
company Pacific Plans.
In this case, the Supreme Court had the opportunity to discuss the
“Cram Down”5 power of the rehabilitation court. This prerogative
5
See section 64 of the Financial Rehabilitation and Insolvency Law (FRIA): Section 64. Creditor Approval of
Rehabilitation Plan. – The rehabilitation receiver shall notify the creditors and stakeholders that the Plan is ready
for their examination. Within twenty (2Q) days from the said notification, the rehabilitation receiver shall convene
the creditors, either as a whole or per class, for purposes of voting on the approval of the Plan. The Plan shall be
deemed rejected unless approved by all classes of creditors w hose rights are adversely modified or affected by the
Plan. For purposes of this section, the Plan is deemed to have been approved by a class of creditors if members of
the said class holding more than fifty percent (50%) of the total claims of the said class vote in favor of the Plan.
The votes of the creditors shall be based solely on the amount of their respective claims based on the registry of
claims submitted by the rehabilitation receiver pursuant to Section 44 hereof.
Notwithstanding the rejection of the Rehabilitation Plan, the court may confirm the Rehabilitation Plan if all of the
following circumstances are present:
(a)The Rehabilitation Plan complies with the requirements specified in this Act.
(b) The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan;
(c) The shareholders, owners or partners of the juridical debtor lose at least their controlling interest as a result of
the Rehabilitation Plan; and
(d) The Rehabilitation Plan would likely provide the objecting class of creditors with compensation which has a
net present value greater than that which they would have received if the debtor were under liquidation.
given to the Rehabilitation Court maintains that the court may approve
a rehabilitation plan over the objection of the creditors if, in its
judgment, the rehabilitation of the debtors is feasible and the opposition
of creditors is manifestly unreasonable. The High Court noted that:
“While the voice and participation of the creditors is crucial in the

determination of the viability of the rehabilitation plan, as they stand to
benefit or suffer in the implementation thereof, the interests of all
stakeholders is the ultimate and prime consideration.”
In relation to corporate rehabilitation proceedings, the Supreme Court

in the case of Philippine Bank of Communications vs. Basic
Polyprinters and Packaging Corporation (GR no.187581, October
2014) ruled as well that the purpose of such proceedings is two-fold –
(1.) To efficiently and equitably distribute the assets of the insolvent
debtor to its creditors; and (2.) To provide the debtor with a fresh start.
The “material financial commitment” rule was also discussed in the

same aforementioned case. This rule becomes significant in
determining the earnestness and good faith of the financially distressed
corporation in financing its proposed rehabilitation plan. This material
financial commitment may include the readiness, willingness and
ability of the corporation to contribute funds or property to guarantee
the operation of the corporation during the period of rehabilitation.
Will the fact that a person acting as President, Chairman and

Treasurer of the corporation justify already the piercing of the veil of
corporate fiction based on the alter-ego theory?
No. In the case of WPM International Trading vs. Labayen (GR

no.182770, September 17, 2014) ruled that, “The control necessary to
invoke the instrumentality or alter ego rule is not majority or even
complete stock control but such domination of finances, policies and
practices that the controlled corporation has, so to speak, no separate
mind, will or existence of its own, and is but a conduit for its principal.
The control must be shown to have been exercised at the time the acts
complained of took place. Moreover, the control and breach of duty
must proximately cause the injury or unjust loss for which the
complaint is made.”
May the Securities and Exchange Commission (SEC) issue a cease

and desist order against a corporation engaging in the sale of pre-
need plans without proper registration?
In Primamanila Plans vs. SEC (GR no.193791, August 6, 2014), the

Supreme Court upheld the authority of the SEC to issue a cease and
desist order. This may be done motu proprio, it being unnecessary that
it results from a verified complaint from an aggrieved party. A prior
hearing is also not required whenever the Commission finds it
appropriate to issue a cease and desist order that aims to curtail fraud or
grave or irreparable injury to investors.
May a Hospital Corporation be liable for negligent acts committed by

its Doctor-Consultants, who are not under their employ?
Yes. Hospitals may be found liable for the negligent acts committed by
its doctor-consultants, even if there is no employer-employee
relationship between them.
As a rule, hospitals are not liable for the negligence of its independent
contractors. However, it may be found liable if the physician or
independent contractor acts as an ostensible agent of the hospital, under
the doctrine of apparent authority, based on proof of the existence of
two important factors – (a.) The hospital’s manifestations, and (b.) The
patient’s reliance.
Is every action filed on behalf of a corporation a derivative suit?
No. Not every suit filed on behalf of the corporation is a derivative

suit. For a derivative suit to prosper, the minority stockholder suing for
and on behalf of the corporation must allege in his complaint that he is
suing on a derivative cause of action on behalf of the corporation and
all other stockholders similarly situated who may wish to join him in
the suit.
The following are the requisites for a derivative suit to prosper:
a) The party bringing suit should be a shareholder as of the time of the

act or transaction complained of, the number of his shares not being
material;
b) He has tried to exhaust intra-corporate remedies, i.e., has made a

demand on the board of directors for the appropriate relief but the latter
has failed or refused to heed his plea; and
c) The cause of action actually devolves on the corporation, the

wrongdoing or harm having been, or being caused to the corporation
and not to the particular stockholder bringing the suit.
In such actions, the corporation is the real party-in-interest while the suing
stockholder, on behalf of the corporation, is only a nominal party.
What is the rule on venue in derivative suits?

Derivative suits to be instituted shall be commenced and tried in the
Regional Trial Court which has jurisdiction over the principal office of
the corporation, partnership, or association concerned. Where the
principal office of the corporation, partnership or association is
registered in the Securities and Exchange Commission as Metro
Manila, the action must be filed in the city or municipality where the
head office is located.
May the doctrine of piercing the veil of corporate fiction apply to a

corporation not impleaded in the suit?
No. A corporation not impleaded in a suit cannot be subject to the

court’s process of piercing the veil of its corporate fiction. In that
situation, the court has not acquired jurisdiction over the corporation
and, hence, any proceedings taken against that corporation and its
property would infringe on its right to due process. The doctrine of
piercing the veil of corporate fiction comes to play only during the trial
of the case after the court has already acquired jurisdiction over the
corporation. Before this doctrine can be applied, the court must first
have jurisdiction over the corporation.
What is the meaning of capital in a corporation?
The term capital and other terms used to describe the capital structure
of a corporation are of universal acceptance and their usages have long
been established in jurisprudence. Briefly, capital refers to the value of
the property or assets of a corporation. The capital subscribed is the
total amount of the capital that persons (subscribers or
shareholders) have agreed to take and pay for, which need not
necessarily by, and can be more than, the par value of the shares.
In fine, it is the amount that the corporation receives, inclusive of

the premiums if any, in consideration of the original issuance of the
shares. In the case of stock dividends, it is the amount that the
corporation transfers from its surplus profit account to its capital
account. It is the same amount that can be loosely termed as the trust
fund of the corporation. The Trust Fund doctrine considers this
subscribed capital as a trust fund for the payment of the debts of the
corporation, to which the creditors may look for satisfaction. Until the
liquidation of the corporation, no part of the subscribed capital may be
returned or released to the stockholder (except in the redemption of
redeemable shares) without violating this principle. Thus, dividends
must never impair the subscribed capital; subscription commitments
cannot be condoned or remitted; nor can the corporation buy its own
shares using the subscribed capital as the considerations therefor.
How do you value the amount of dividends to be declared?
Dividends, regardless of the form these are declared, that is, cash,
property or stocks, are valued at the amount of the declared dividend
taken from the unrestricted retained earnings of a corporation. Thus, the
value of the declaration in the case of a stock dividend is the actual
value of the original issuance of said stocks.
The Supreme Court has also said that in the case of stock dividends, it
is the amount that the corporation transfers from its surplus profit
account to its capital account or it is the amount that the corporation
receives in consideration of the original issuance of the shares. It is the
distribution of current or accumulated earnings to the shareholders of a
corporation pro rata based on the number of shares owned. Such
distribution in whatever form is valued at the declared amount or
monetary equivalent.
Is there consideration involved in the issuance of stock dividends?
Yes. The declaration of stock dividends is equivalent to a forced

purchase of stocks. By declaring stock dividends, a corporation ploughs
back a portion or its entire unrestricted retained earnings either to its
working capital or for capital asset acquisition or investments. It is
simplistic to say that the corporation did not receive any actual
payment for these. When the dividend is distributed, it ceases to be a
property of the corporation as the entire or portion of its unrestricted
retained earnings is distributed pro rata to corporate shareholders.
WHAT IS THE CONTROVERSY TEST IN INTRACORPORATE

DISPUTES?
Under the nature of the controversy test, the Incidents of that

relationship must also be considered for the purpose of ascertaining
whether the controversy itself is intra -corporate. The controversy must
not only be rooted in the existence of an intra corporate relationship but
must as well pertain to the enforcement of the parties’ correlative rights
and obligations under the Corporation Code and the internal and intra –
corporate regulatory rules of the corporation. If the relationship and its
incidents are merely incidental to the controversy or if there will still be
conflict even if the relationship does not exist, then no intra corporate
controversy exists.
WHAT IS THE ALTER-EGO THEORY?

Case law lays down a three-pronged test to determine the application of
the alter ego theory, which is also known as the instrumentality theory,
namely:
(A) Control, not mere majority or complete stock control, but complete
own
(B) Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of
plaintiff’s legal right; and
(C) The aforesaid control and breach of duty must have proximately
caused the injury or unjust loss complained of.
WHAT IS THE THREE-PRONGED TEST TO DETERMINE THE

APPLICATION OF THE ALTER EGO THEORY?
In this connection, case law lays down a three-pronged test to

determine the application of the alter ego theory, which is also known
as the instrumentality theory, namely:
1. Control, not mere majority or complete stock control, but complete

own;
2. Such control must have been used by the defendant to commit fraud
or wrong, to perpetuate the violation of a statutory or other positive
legal duty, or dishonest and unjust act in contravention of plaintiff’s
legal right; and;
3. The aforesaid control and breach of duty must have proximately

caused the injury or unjust loss complained of.
The first prong is the "instrumentality" or "control" test. This test

requires that the subsidiary be completely under the control and
domination of the parent. It inquires whether a subsidiary corporation is
so organized and controlled and its affairs are so conducted as to make
it a mere instrumentality or agent of the parent corporation such that its
separate existence as a distinct corporate entity will be ignored. In
addition, the control must be shown to have been exercised at the time
the acts complained of took place.
The second prong is the "fraud" test. This test requires that the parent
corporation’s conduct in using the subsidiary corporation be unjust,
fraudulent or wrongful. It examines the relationship of the plaintiff to
the corporation. It recognizes that piercing is appropriate only if the
parent corporation uses the subsidiary in a way that harms the plaintiff
creditor. As such, it requires a showing of "an element of injustice or
fundamental unfairness."
The third prong is the "harm" test. This test requires the plaintiff to
show that the defendant’s control, exerted in a fraudulent, illegal or
otherwise unfair manner toward it, caused the harm suffered. A causal
connection between the fraudulent conduct committed through the
instrumentality of the subsidiary and the injury suffered or the damage
incurred by the plaintiff should be established. The plaintiff must prove
that, unless the corporate veil is pierced, it will have been treated
unjustly by the defendant’s exercise of control and improper use of the
corporate form and, thereby, suffer damages.
What is the role of the Corporate Secretary in a corporation?
It is the signature of the corporate secretary, as the one who is tasked to

prepare and record the minutes, that gives the minutes of the meeting
probative value and credibility.
The non-signing by the majority of the members of Board of Trustees

of the said minutes does not necessarily mean that the supposed
resolution was not approved by the board. The signing of the minutes
by all the members of the board is not required. There is no provision
in the Corporation Code of the Philippines that requires that the
minutes of the meeting should be signed by all the members of the
board.
The proper custodian of the books, minutes and official records of a

corporation is usually the corporate secretary. Being the custodian of
corporate records, the corporate secretary has the duty to record and
prepare the minutes of the meeting. The signature of the corporate
secretary gives the minutes of the meeting probative value and
credibility.
Thus, without the certification of the corporate secretary, it is

incumbent upon the other directors or stockholders as the case may be,
to submit proof that the minutes of the meeting is accurate and
reflective of what transpired during the meeting. (LOPEZ REALTY,
INC. AND ASUNCION LOPEZ-GONZALES vs. SPOUSES
REYNALDO TANJANGCO AND MARIA LUISA ARGUELLES-
TANJANGCO, G.R. No. 154291, November 12, 2014)
Can the refusal to inspect corporate books be the basis of a criminal
complaint?
Yes. All the rights guaranteed to corporators under Section 74 of the

Corporation Code are mandatory for the corporation to respect. All
such rights are just the same underpinned by the same policy
consideration of keeping public confidence in the corporate vehicle
thru an assurance of transparency in the corporation's operations.
(ADERITO Z. YUJUICO AND BONIFACIO C. SUMBILLA
vs. CEZAR T. QUIAMBAO AND ERIC C. PILAPIL, G.R. No.
180416, June 02, 2014)
MAY A DISSOLVED CORPORATION STILL CONTINUE TO

FILE CASES?
Yes. A dissolved corporation may still continue to file cases within the
prescribed three-year period under Section 122 of the Corporation
Code.
SEC. 122. Corporate liquidation. Every corporation whose charter

expires by its own limitation or is annulled by forfeiture or otherwise,
or whose corporate existence for other purposes is terminated in any
other manner, shall nevertheless be continued as a body corporate for
three (3) years after the time when it would have been so dissolved, for
the purpose of prosecuting and defending suits by or against it and
enabling it to settle and close its affairs, to dispose of and convey its
property and to distribute its assets, but not for the purpose of
continuing the business for which it was established.
At any time during said three (3) years, said corporation is authorized
and empowered to convey all of its property to trustees for the benefit
of stockholders, members, creditors, and other persons in
interest. From and after any such conveyance by the corporation of its
property in trust for the benefit of its stockholders, members, creditors
and others in interest, all interest which the corporation had in the
property terminates, the legal interest vests in the trustees, and the
beneficial interest in the stockholders, members, creditors or other
persons in interest.
Upon winding up of the corporate affairs, any asset distributable to

any creditor or stockholder or member who is unknown or cannot be
found shall be escheated to the city or municipality where such assets
are located.
Will a change in corporate name result in the creation of a new

corporation?
No. A change in the corporate name does not make a new corporation,
whether effected by a special act or under a general law. It has no effect
on the identity of the corporation, or on its property, rights, or liabilities
because the corporation upon such change in its name, is in no sense a
new corporation, nor the successor of the original corporation.
The mere change in the corporate name is not considered under the law
as the creation of a new corporation; hence, the renamed corporation
remains liable for the illegal dismissal of its employee separated under
that guise. Verily, the amendments of the articles of incorporation of
Zeta to change the corporate name to Zuellig Freight and Cargo
Systems, Inc., did not produce the dissolution of the former as a
corporation. (Zuellig Freight and Cargo Systems. National Labor
Relations Commission, et al., G.R. No. 157900, July 22, 2013)
What are the rules on corporate merger?
Merger is a re-organization of two or more corporations that results in

their consolidating into a single corporation, which is one of the
constituent corporations, one disappearing or dissolving and the other
surviving. To put it another way, merger is the absorption of one or
more corporations by another existing corporation, which retains its
identity and takes over the rights, privileges, franchises, properties,
claims, liabilities and obligations of the absorbed corporation(s). The
absorbing corporation continues its existence while the life or lives of
the other corporation(s) is or are terminated.
The Corporation Code requires the following steps for merger or

consolidation:
(a.) The board of each corporation draws up a plan of merger or

consolidation. Such plan must include any amendment, if necessary, to
the articles of incorporation of the surviving corporation, or in case of
consolidation, all the statements required in the articles of
incorporation of a corporation.
(b.) Submission of plan to stockholders or members of each corporation

for approval. A meeting must be called and at least two (2) weeks’
notice must be sent to all stockholders or members, personally or by
registered mail. A summary of the plan must be attached to the notice.
Vote of two-thirds of the members or of stockholders representing two
thirds of the outstanding capital stock will be needed. Appraisal rights,
when proper, must be respected.
(c.) Execution of the formal agreement, referred to as the articles of

merger o[r] consolidation, by the corporate officers of each constituent
corporation. These take the place of the articles of incorporation of the
consolidated corporation or amend the articles of incorporation of the
surviving corporation.
(d.) Submission of said articles of merger or consolidation to the SEC

for approval.
(e.) If necessary, the SEC shall set a hearing, notifying all corporations
concerned at least two weeks before.
(f.) Issuance of certificate of merger or consolidation.
A merger does not become effective upon the mere agreement of the
constituent corporations. All the requirements specified in the law must
be complied with in order for merger to take effect. Section 79 of the
Corporation Code further provides that the merger shall be effective
only upon the issuance by the Securities and Exchange Commission
(SEC) of a certificate of merger.
IS THERE A DIFFERENCE BETWEEN PROXY SOLICITATION

AND PROXY VALIDATION?
It is plain that proxy solicitation is a procedure that antecedes proxy

validation. The former involves the securing and submission of proxies,
while the latter concerns the validation of such secured and submitted
proxies
WHEN IS PROXY AVAILABLE?
Shares of stock in corporations may be divided into voting shares and

non-voting shares, which are generally issued as preferred or
redeemable shares. Voting rights are exercised during regular or special
meetings of stockholders; regular meetings to be held annually on a
fixed date, while special meetings may be held at any time necessary or
as provided in the by-laws, upon due notice. The Corporation Code
provides for a whole range of matters which can be voted upon by
stockholders, including a limited set on which even non-voting
stockholders are entitled to vote on. On any of these matters which may
be voted upon by stockholders, the proxy device is generally available.
Is a corporation entitled to moral damages?
As a rule, a corporation is not entitled to moral damages because, not

being a natural person, it cannot experience physical suffering or
sentiments like wounded feelings, serious anxiety, mental anguish and
moral shock. The only exception to this rule is when the corporation
has a reputation that is debased, resulting in its humiliation in the
business realm. But in such a case, it is essential to prove the existence
of the factual basis of the damage and its causal relation to petitioner’s
acts. (Manila Electric Company vs. T.E.A.M. Electronics Corporation,
Technology Electronics Assembly and Management Pacific
Corporation; and Ultra Electronics Instruments, Inc., G.R. No. 131723,
December 13, 2007)
What is the purpose of financial rehabilitation?
Rehabilitation proceedings have a two-pronged purpose, namely: (a) to

efficiently and equitably distribute the assets of the insolvent debtor to
its creditors; and (b) to provide the debtor with a fresh start, viz:
Rehabilitation proceedings in our jurisdiction have equitable and
rehabilitative purposes. On the one hand, they attempt to provide for
the efficient and equitable distribution of an insolvent debtor's
remaining assets to its creditors; and on the other, to provide debtors
with a "fresh start" by relieving them of the weight of their outstanding
debts and permitting them to reorganize their affairs. The purpose of
rehabilitation proceedings is to enable the company to gain a new lease
on life and thereby allow creditors to be paid their claims from its
earnings.
TRANSPORTATION LAW
Laws Covered
1. Civil Code
Arts. 1732-1734 (General Provisions)

Arts.1736-1753 (Vigilance over Goods)
Arts.1754-1766 (Safety of Passengers)
2. Warsaw Convention
Civil Code Provisions
Art. 1732 - Common carriers
Vector Shipping Corp., et al. vs. Adelfo B. Macasa, et al., G.R. No.
160219, July 21, 2008
Alejandro Arada vs. Court of Appeals, G.R. No. 98243, July 1, 1992
Pedro de Guzman vs. CA and Ernesto Cendaña, G.R. No. L-47822,

December 22, 1988
Philippine Air Lines, Inc. vs. Court of Appeals, G.R. No. L-46558, July
31, 1981
The test to determine a common carrier is "whether the given

undertaking is a part of the business engaged in by the carrier which he
has held out to the general public as his occupation rather than the
quantity or extent of the business transacted." . . .
Planters Products, Inc. vs. Court of Appeals, G.R. No. 101503,

September 15, 1993
Estrellita M. Bascos vs. Court of Appeals, G.R. No. 101089, April 7,

1993
Article 1732 makes no distinction between one whose principal

business activity is the carrying of persons or goods or both, and one
who does such carrying only as an ancillary activity (in local idiom, as
"a sideline"). Article 1732 also carefully avoids making any distinction
between a person or enterprise offering transportation service on a
regular or scheduled basis and one offering such service on an
occasional, episodic or unscheduled basis. Neither does Article 1732
distinguish between a carrier offering its services to the "general
public," i.e., the general community or population, and one who offers
services or solicits business only from a narrow segment of the general
population
First Phil. Industrial Corp. vs. Court of Appeals, G.R. No. 125948,
December 29, 1998
National Steel Corp. vs. Court of Appeals, G.R. No. 112287 & 112350,
December 12, 1997
Engracio Fabre, Jr. vs. Court of Appeals, G.R. No. 111127, July 26,
1996
It is not necessary that the carrier be issued a certificate of public
convenience, and this public character is not altered by the fact that the
carriage of the goods in question was periodic, occasional, episodic or
unscheduled
Asia Lighterage and Shipping, Inc. vs. Court of Appeals, G.R. No.
147246, August 19, 2003
Philippine American General Insurance Company vs. PKS Shipping

Company, G.R. No. 149038, April 9, 2003
FGU Insurance Corp. vs. G.P. Sarmiento Trucking Corp., G.R. No.
141910. August 6, 2002
Virgines Calvo vs. UCPB General Insurance Co., G.R. No. 148496.
March 19, 2002
Loadstar Shipping Co. vs. Court of Appeals, G.R. No. 131621.

September 28, 1999
A freight forwarder's liability is limited to damages arising from its

own negligence, including negligence in choosing the carrier; however,
where the forwarder contracts to deliver goods to their destination
instead of merely arranging for their transportation, it becomes liable as
a common carrier for loss or damage to goods. A freight forwarder
assumes the responsibility of a carrier, which actually executes the
transport, even though the forwarder does not carry the merchandise
itself.
Unsworth Transport International (Phils.), Inc. vs. Court of Appeals, et

al., G.R. No. 166250, July 26, 2010
Art. 1733 - Common carriers are bound to observe extraordinary

diligence
Virgines Calvo vs. UCPB General Insurance Co., G.R. No. 148496.
March 19, 2002
Phil-Am General Insurance Co., Inc. vs. Court of Appeals, G.R. No.
116940, June 11, 1997
Trans-Asia Shipping Lines vs. Court of Appeals, G.R. No. 118126,

March 4, 1996

September 15, 1993
American Home Assurance, Co. vs. Court of Appeals, G.R. No. 94149,
May 5, 1992
Heirs of Amparo De Los Santos vs. Court of Appeals, G.R. No. 51165,
June 21, 1990
31, 1981
Common carriers are bound to observe extraordinary diligence over the

goods they transport.
We need only to stress that from the nature of their business and for
reasons of public policy, common carriers are bound to observe
extraordinary diligence over the goods they transport according to all
the circumstances of each case. In the event of loss, destruction or
deterioration of the insured goods, common carriers are responsible,
unless they can prove that the loss, destruction or deterioration was
brought about by the causes specified in Article 1734 of the Civil Code.
In all other cases, common carriers are presumed to have been at fault
or to have acted negligently, unless they prove that they observed
extraordinary diligence.
Aboitiz Shipping Corp. vs. New India Assurance Co., Ltd., G.R. No.
156978, August 24, 2007
A common carrier and, as such, is obliged to exercise extraordinary

diligence in transporting its passengers safely.
Victory Liner, Inc. vs. Pablo Race, G.R. No. 164820, December 8,
2008
A common carrier, from the nature of its business and for reasons of
public policy, is bound to observe extraordinary diligence for the safety
of the passengers it transports.
Armando G. Yrasuegui vs. Philippine Airlines, Inc., G.R. No. 168081,

October 17, 2008
A common carrier is bound by law to exercise extraordinary diligence

and utmost care in ensuring for the safety and welfare of its passengers
with due regard for all the circumstances.
Philippine Airlines, Inc. vs. Court of Appeals, et al., G.R. No. 123238,
September 22, 2008
Mere proof of delivery of the goods in good order to a common carrier

and of their arrival in bad order at their destination constitutes a prima
facie case of fault or negligence against the carrier. If no adequate
explanation is given as to how the deterioration, loss, or destruction of
the goods happened, the transporter shall be held responsible.

al., G.R. No. 166250, July 26, 2010
Art. 1734 - When common carriers are not responsible for loss,
destruction, or deterioration of goods
Iron Bulk Shipping Phil., Co., Ltd. vs. Remington Industrial Sales
Corp., G.R. No. 136960, December 8, 2003
DSR-Senator Lines vs. Federal Phoenix Assurance Co., Inc., G.R. No.
135377, October 7, 2003
Asia Lighterage and Shipping, Inc. vs. Court of Appeals, G.R. No.
147246, August 19, 2003
Phil. American General Insurance vs. MGG Marine Services, G.R. No.
135645, March 8, 2002
Eastern Shipping Lines, Inc. vs. Court of Appeals, G.R. No. 97412,
July 12, 1994

September 15, 1993
May 5, 1992
Though it is true that common carriers are presumed to have been at

fault or to have acted negligently if the goods transported by them are
lost, destroyed, or deteriorated, and that the common carrier must prove
that it exercised extraordinary diligence in order to overcome the
presumption, the plaintiff must still, before the burden is shifted to the
defendant, prove that the subject shipment suffered actual shortage.
This can only be done if the weight of the shipment at the port of origin
and its subsequent weight at the port of arrival have been proven by a
preponderance of evidence, and it can be seen that the former weight is
considerably greater than the latter weight, taking into consideration
the exceptions provided in Article 1734 of the Civil Code.
Asian Terminals, Inc. vs. Simon Enterprises, Inc., G.R. No. 177116,
February 27, 2013
The Berth Term Grain Bill of Lading states that the subject shipment
was carried with the qualification "Shipper's weight, quantity and
quality unknown," meaning that it was transported with the carrier
having been oblivious of the weight, quantity, and quality of the cargo.
This interpretation of the quoted qualification is supported by Wallem
Philippines Shipping, Inc. v. Prudential Guarantee & Assurance, Inc., a
case involving an analogous stipulation in a bill of lading, wherein the
Supreme Court held that:
Indeed, as the bill of lading indicated that the contract of carriage was
under a "said to weigh" clause, the shipper is solely responsible for the
loading while the carrier is oblivious of the contents of the shipment.
The fact that the cargo was shipped with the arrangement "Shipper's
weight, quantity and quality unknown," indeed means that the weight
of the cargo could not be determined using as basis the figures written
on the Berth Term Grain Bill of Lading... Consequently, the respondent
must still prove the actual weight of the subject shipment at the time it
was loaded at the port of origin so that a conclusion may be made as to
whether there was indeed a shortage for which petitioner must be
liable. . . The respondent having failed to present evidence to prove the
actual weight of the subject shipment when it was loaded onto the M/V
"Tern," its cause of action must then fail because it cannot prove the
shortage that it was alleging. Indeed, if the claimant cannot definitively
establish the weight of the subject shipment at the point of origin, the
fact of shortage or loss cannot be ascertained. The claimant then has no
basis for claiming damages resulting from an alleged shortage.
Asian Terminals, Inc. vs. Simon Enterprises, Inc., G.R. No. 177116,
February 27, 2013 citing Wallem Philippines Shipping, Inc. v.
Prudential Guarantee & Assurance, Inc., 445 Phil. 136, 153 (2003)
Art. 1735 - When common carriers are presumed to have been at fault
or to have acted negligently
Presumption of Fault or Negligence by Common Carriers
A business intended to serve the travelling public primarily, a contract

of carriage is imbued with public interest. The law governing common
carriers consequently imposes an exacting standard. Article 1735 of the
Civil Code provides that in case of lost or damaged goods, common
carriers are presumed to have been at fault or to have acted negligently,
unless they prove that they observed extraordinary diligence as
required by Article 1733. Thus, in an action based on a breach of
contract of carriage, the aggrieved party does not have to prove that the
common carrier was at fault or was negligent. All that he has to prove
is the existence of the contract and the fact of its non-performance by
the carrier.
Air France vs. Bonifacio H. Gillego, G.R. No. 165266, December 15,
2010
Aboitiz Shipping Corp. vs. Insurance Company of North America, G.R.

No. 168402, August 6, 2008
July 12, 1994
Home Insurance Corp. vs. Court of Appeals, G.R. No. 109293, August
18, 1993
Extraordinary diligence must include safeguarding the shipment from

damage coming from natural elements such as rainfall.
Aboitiz Shipping Corp. vs. Insurance Co. of North America, G.R. No.
168402, August 6, 2008
Art. 1736 - Extraordinary responsibility of common carriers
October 17, 1990
Explicit is the rule under Article 1736 of the Civil Code that the
extraordinary responsibility of the common carrier begins from the
time the goods are delivered to the carrier. This responsibility remains
in full force and effect even when they are temporarily unloaded or
stored in transit unless the shipper or owner exercises the right of
stoppage in transit and terminates only after the lapse of a reasonable
time for the acceptance of the goods by the consignee or such other
person entitled to receive them. And, there is delivery to the carrier
when the goods are ready for and have been placed in the exclusive
possession, custody and control of the carrier for the purpose of their
immediate transportation and the carrier has accepted them. Where
such a delivery has thus been accepted by the carrier, the liability of the
common carrier commences eo instanti.
Benito Macam vs. Court of Appeals, G.R. No. 125524, August 25, 1999
Aniceto G. Saludo, Jr. vs. Court of Appeals, G.R. No. 95536, March
23, 1992
Art. 1739 - Common carrier must exercise due diligence to prevent or

minimize loss before, during and after natural disaster to be exempt
from liability
Alejandro Arada vs. Court of Appeals, G.R. No. 98243, July 1, 1992
Eastern Shipping Lines, Inc. vs. Intermediate Appellate Court, G.R.

No. L-69044. May 29, 1987
Art. 1742 - Common carrier must exercise due diligence to forestall or

lessen loss
Iron Bulk Shipping Phil., Co., Ltd. vs. Remington Industrial Sales
Corp., G.R. No. 136960, December 8, 2003
Art. 1744 - Stipulation limiting liability of common carrier to degree

less than extraordinary diligence
Samar Mining Co., Inc. vs. Nordeutscher Lloyd, G.R. No. L-28673.
October 23, 1984
Amparo Servando vs. Phil. Steam Navigation Co., G.R. Nos. L-36481-
2. October 23, 1982
It is to be noted that the Civil Code does not limit the liability of the
common carrier to a fixed amount per package. In all matters not
regulated by the Civil Code, the rights and obligations of common
carriers are governed by the Code of Commerce and special laws.
Thus, the COGSA supplements the Civil Code by establishing a
provision limiting the carrier's liability in the absence of a shipper's
declaration of a higher value in the bill of lading.

al., G.R. No. 166250, July 26, 2010
Art. 1745 - Stipulations considered unreasonable, unjust and contrary

to public policy
Valenzuela Hardwood and Industrial Supply vs. Court of Appeals, G.R.

No. 102316, June 30, 1997
Estrellita M. Bascos vs. Court of Appeals, G.R. No. 101089, April 7,

1993
Pedro de Guzman vs. CA and Ernesto Cendaña, G.R. No. L-47822,

December 22, 1988
Art. 1749 - Stipulation limiting common carrier's liability to value of

the goods appearing in bill of lading
Phil. Charter Insurance Corp. vs. Neptune Orient Lines, et al., G.R.
No. 145044, June 12, 2008
Yao Ka Sin Trading vs. Court of Appeals, G.R. No. 53820, June 15,
1992
A stipulation in the bill of lading limiting the common carrier's liability

for loss or destruction of a cargo to a certain sum, unless the shipper or
owner declares a greater value, is sanctioned by law.
Philippine Charter Insurance Corp. vs. Neptune Orient Lines, et al.,

G.R. No. 145044, June 12, 2008
A bill of lading is a written acknowledgement of the receipt of goods

and an agreement to transport and to deliver them at a specified place
to a person named or on his or her order. It operates both as a receipt
and as a contract. It is a receipt for the goods shipped and a contract to
transport and deliver the same as therein stipulated. As a receipt, it
recites the date and place of shipment, describes the goods as to
quantity, weight, dimensions, identification marks, condition, quality,
and value. As a contract, it names the contracting parties, which
include the consignee; fixes the route, destination, and freight rate or
charges; and stipulates the rights and obligations assumed by the
parties.

al., G.R. No. 166250, July 26, 2010
Art. 1750 - Contract fixing the sum that may be recovered by the
owner or shipper for the loss, destruction, or deterioration of the goods,
when valid
Phil. Charter Insurance Corp. vs. Neptune Orient Lines, et al., G.R.
No. 145044, June 12, 2008
A stipulation in the bill of lading limiting the common carrier's liability

for loss or destruction of a cargo to a certain sum, unless the shipper or
owner declares a greater value, is sanctioned by law.
Philippine Charter Insurance Corp. vs. Neptune Orient Lines, et al.,

G.R. No. 145044, June 12, 2008
Art. 1753 - Governing law
May 5, 1992
Maritime Company of the Phils. vs. Court of Appeals, G.R. No. 47004,
March 8, 1989
Eastern Shipping Lines, Inc. vs. Intermediate Appellate Court, G.R.
No. L-69044. May 29, 1987
Art. 1755 - Duty of common carrier for safety of passengers
Art. 1755 - Duty or common carrier for safety of passengers
Japan Airlines vs. Jesus Simangan, G.R. No. 170141, April 22, 2008
Fortune Express vs. Court of Appeals, G.R. No. 119756, March 18,
1999

March 4, 1996
Dangwa Transportation Co., Inc. vs. Court of Appeals, G.R. No.

95582, October 7, 1991
June 21, 1990
Kapalaran Bus Line vs. Angel Coronado, G.R. No. 85331, August 25,
1989
31, 1981
A common carrier is bound by law to exercise extraordinary diligence

and utmost care in ensuring for the safety and welfare of its passengers
with due regard for all the circumstances.
Philippine Airlines, Inc. vs. Court of Appeals, et al., G.R. No. 123238,
September 22, 2008
A common carrier is bound to carry the passengers safely as far as

human care and foresight can provide, using the utmost diligence of
very cautious persons, with a due regard for all the circumstances.

October 17, 2008
Art. 1756 - Common carriers presumed at fault or negligent in case of

death of or injuries to passengers
June 21, 1990
Batangas Laguna Tayabas Bus Co. vs. Intermediate Appellate Court,
G.R. Nos. 74387-90, Nov. 14, 1988
31, 1981
Art. 1759 - When common carriers are liable for negligence or willful
acts of its employees
Baliwag Transit, Inc. vs. Court of Appeals, G.R. No. 116110, May 15,
1996
Art. 1762 - Contributory negligence of passenger
Philippine National Railways vs. Court of Appeals, G.R. No. L-55347.

October 4, 1985
Art. 1763 - When common carrier is responsible for willful acts or

negligence of other passengers or of strangers
1999
Jose Pilapil vs. Court of Appeals, G.R. No. 52159. December 22, 1989
A common carrier is bound to carry its passengers safely as far as

human care and foresight can provide, using the utmost diligence of
very cautious persons, with due regard for all the circumstances.

October 17, 2008
Art. 1764 - Damages against common carriers
1999

March 4, 1996
Suplicio Lines, Inc. vs. Court of Appeals, G.R. No. 113578, July 14,
1995
Philippine Airlines, Inc. vs. Court of Appeals, G.R. No. 54470, May 8,
1990
The "receipt by a person of a share in the profits of a business is prima

facie evidence that he is a partner in the business."
Philex Mining Corp. vs. CIR, G.R. No. 148187, April 16, 2008
As a general rule, moral damages are not recoverable in actions for

damages predicated on a breach of contract, unless there is fraud or bad
faith. As an exception, moral damages may be awarded in case of
breach of contract of carriage that results in the death of a passenger, in
accordance with Article 1764, in relation to Article 2206 (3) of the
Civil Code.
[Articles 1764 and 2206] set forth the persons entitled to moral
damages. The omission from Article 2206 (3) of the brothers and
sisters of the deceased passenger reveals the legislative intent to
exclude them from the recovery of moral damages for mental anguish
by reason of the death of the deceased. Inclusio unius est exclusio
alterius.
Sulpicio Lines, Inc. vs. Domingo E. Curso, et al., G.R. No. 157009,
March 17, 2010
As a general rule, indeed, moral damages are not recoverable in an

action predicated on a breach of contract. This is because such action is
not included in Article 2219 of the Civil Code as one of the actions in
which moral damages may be recovered. By way of exception, moral
damages are recoverable in an action predicated on a breach of
contract: (a) where the mishap results in the death of a passenger, as
provided in Article 1764, in relation to Article 2206 (3), of the Civil
Code; and (b) where the common carrier has been guilty of fraud or
bad faith, as provided in Article 2220 of the Civil Code.
Philtranco Service Enterprises, Inc. vs. Felix Paras, et al., G.R. No.
161909, April 25, 2012
Art. 1766 - Code of commerce and other special laws
May 5, 1992
WARSAW CONVENTION
Warsaw Convention" means the Convention for the Unification of

Certain Rules Relating to International Carriage by Air signed at
Warsaw on 12 October 1929, or the Warsaw Convention as amended at
The Hague, 1955.
February 9, 1951
WARSAW CONVENTION FOR THE UNIFICATION OF CERTAIN
RULES RELATING TO INTERNATIONAL CARRIAGE BY AIR *
The President of the German Reich, the Federal President of the

Republic of Austria, His Majesty the King of the Belgians, the
President of the United States of Brazil, His Majesty the King of the
Bulgarians, the President of the Nationalist Government of China, His
Majesty the King of Denmark and Iceland, His Majesty the King of
Egypt, His Majesty the King of Spain, the Chief of State of the
Republic of Estonia, the President of the Republic of Finland, the
President of the French Republic, His Majesty the King of Great
Britain, Ireland, and the British Dominions beyond the Seas, Emperor
of India, the President of the Hellenic Republic, His Most Serene
Highness the Regent of the Kingdom of Hungary, His Majesty the
King of Italy, His Majesty the Emperor of Japan, the President of the
Republic of Latvia, Her Royal Highness the Grand Duchess of
Luxemburg, the President of the United Mexican States, His Majesty
the King of Norway, Her Majesty the Queen of the Netherlands, the
President of the Republic of Poland, His Majesty the King of Rumania,
His Majesty the King of Sweden, the Swiss Federal Council, the
President of the Czechoslovak Republic, the Central Executive
Committee of the Union of Soviet Socialist Republics, the President of
the United States of Venezuela, His Majesty the King of Yugoslavia:
Having recognized the advantage of regulating in a uniform manner the

conditions of international transportation by air in respect of the
documents used for such transportation and of the liability of the
carrier,
Having nominated to this end their respective Plenipotentiaries, who,

being thereto duly authorized, have concluded and signed the following
convention:
CHAPTER I
Scope of Definitions
ARTICLE 1. (1) This convention shall apply to all international

transportation of persons, baggage, or goods performed by aircraft for
hire. It shall apply equally to gratuitous transportation by aircraft
performed by an air transportation enterprise.
(2) For the purposes of this convention the expression "international

transportation" shall mean any transportation in which, according to the
contract made by the parties, the place of departure and the place of
destination, whether or not there be a break in the transportation or a
transshipment, are situated either within the territories of two High
Contracting Parties, or within the territory of a single High Contracting
Party, if there is an agreed stopping place within a territory subject to
the sovereignty, suzerainty, mandate or authority of another power,
even though that power is not a party to this convention. Transportation
without such an agreed stopping place between territories subject to the
sovereignty, suzerainty, mandate, or authority of the same High
Contracting Party shall not be deemed to be international for the
purposes of this convention.
(3) Transportation to be performed by several successive air carriers

shall be deemed, for the purposes of this convention, to be one
undivided transportation, if it has been regarded by the parties as a
single operation, whether it has been agreed upon under the form of a
single contract or of a series of contracts, and it shall not lose its
international character merely because one contract or a series of
contracts is to be performed entirely within a territory subject to the
sovereignty, suzerainty, mandate, or authority of the same High
Contracting Party.
ARTICLE 2. (1) This convention shall apply to transportation

performed by the state or by legal entities constituted under public law
provided it falls within the conditions laid down in Article 1.
2. This convention shall not apply to transportation performed

under the terms of any international postal convention.
CHAPTER II
Transportation Documents
SECTION I
Passenger Ticket
ARTICLE 3. (1) For the transportation of passengers, the carrier

must deliver a passenger ticket which shall contain the following
particulars:
(a) The place and date of issue;
(b) The place of departure and of destination;
(c) The agreed stopping places, provided that the carrier may reserve
the right to alter the stopping places in case of necessity, and that if he
exercises that right, the alteration shall not have the effect of depriving
the transportation of its international character;
(d) The name and address of the carrier or carriers;
(e) A statement that the transportation is subject to the rules relating

to liability established by this convention.
(2) The absence, irregularity, or loss of the passenger ticket shall not
affect the existence or the validity of the contract of transportation,
which shall none the less be subject to the rules of this convention.
Nevertheless, if the carrier accepts a passenger without a passenger
ticket having been delivered he shall not be entitled to avail himself of
those provisions of this convention which exclude or limit his liability.
SECTION II
Baggage Check
ARTICLE 4. (1) For the transportation of baggage, other than

small personal objects of which the passenger takes charge himself, the
carrier must deliver a baggage check.
(2) The baggage check shall be made out in duplicate, one part for
the passenger and the other part for the carrier.
(3) The baggage check shall contain the following particulars:
(a) The place and date of issue;
(b) The place of departure and of destination;
(c) The name and address of the carrier or carriers;
(d) The number of the passenger ticket;
(e) A statement that delivery of the baggage will be made to the

bearer of the baggage check;
(f) The number and weight of the packages;
(g) The amount of the value declared in accordance with article 22

(2);
(h) A statement that the transportation is subject to the rules relating

to liability established by this convention.
(4) The absence, irregularity, or loss of the baggage check shall not
affect the existence or the validity of the contract of transportation
which shall none the less be subject to the rules of this convention.
Nevertheless, if the carrier accepts baggage without a baggage check
having been delivered, or if the baggage check does not contain the
particulars set out at (d), (f), and (h) above, the carrier shall not be
entitled to avail himself of those provisions of the convention which
exclude or limit his ability.
SECTION III
Air Waybill
ARTICLE 5. (1) Every carrier of goods has the right to require

the consignor to make out and hand over to him a document called an
"air waybill"; every consignor has the right to require the carrier to
accept this document.
(2) The absence, irregularity, or loss of this document shall not

affect the existence or the validity of the contract of transportation
which shall, subject to the provisions of Article 9, be none the less
governed by the rules of this convention.
ARTICLE 6. (1) The air waybill shall be made out by the

consignor in three original parts and be handed over with the goods.
(2) The first part shall be marked "for the carrier” and shall be
signed by the consignor. The second part shall be marked "for the
consignee"; it shall be signed by the consignor and by the carrier and
shall accompany the goods. The third part shall be signed by the carrier
and handed by him to the consignor after the goods have been
accepted.
(3) The carrier shall sign on acceptance of the goods.
(4) The signature of the carrier may be stamped; that of the

consignor may be printed or stamped.
(5) If, at the request of the consignor, the carrier makes out the air
waybill, he shall be deemed, subject to proof to the contrary, to have
done so on behalf of the consignor.
ARTICLE 7. The carrier of goods has the right to require the

consignor to make out separate waybills when there is more than one
package.
ARTICLE 8. The air waybill shall contain the following

particulars:
a. The place and date of its execution;

b. The place of departure and of destination;
c. The agreed stopping places, provided that the carrier may reserve the
right to alter the stopping places in case of necessity, and that if he
exercises that right the alteration shall not have the effect of depriving
the transportation of its international character;
d. The name and address of the consignor;
e. The name and address of the first carrier;
f. The name and address of the consignee, if the case so requires;
g. The nature of the goods;
h. The number of packages, the method of packing, and the particular
marks or numbers upon them;
i. The weight, the quantity, the volume, or dimensions of the goods;
j. The apparent condition of the goods and of the packing;
k. The freight, if it has been agreed upon, the date and place of payment,
and the person who is to pay it;
l. If the goods are sent for payment on delivery, the price of the goods,
and, if the case so requires, the amount of the expenses incurred;
m. The amount of the value declared in accordance with Article 22
(2).
n. The number of parts of the air waybill;
o. The documents handed to the carrier to accompany the air waybill;
p. The time fixed for the completion of the transportation and a brief note
of the route to be followed, if these matters have been agreed upon;
q. A statement that the transportation is subject to the rules relating to
liability established by this convention.
ARTICLE 9. If the carrier accepts goods without an air waybill

having been made out, or if the air waybill does not contain all the
particulars set out in Article 8 (a) to (i), inclusive, and (q), the carrier
shall not be entitled to avail himself of the provisions of this
convention which exclude or limit his liability.
ARTICLE 10. (1) The consignor shall be responsible for the

correctness of the particulars and statements relating to the goods
which he inserts in the air waybill.
(2) The consignor shall be liable for all damages suffered by the
carrier or any other person by reason of the irregularity, incorrectness
or incompleteness of the said particulars and statements.
ARTICLE 11. (1) The air waybill shall be prima facie evidence of
the conclusion of the contract, of the receipt of the goods and of the
conditions of transportation.
(2) The statements in the air waybill relating to the weight,

dimensions, and packing of the goods, as well as those relating to the
number of packages, shall be prima facie evidence of the facts stated;
those relating to the quantity, volume and condition of the goods shall
not constitute evidence against the carrier except so far as they both
have been, and are stated in the air waybill to have been, checked by
him in the presence of the consignor, or relate to the apparent condition
of the goods.
ARTICLE 12. (1) Subject to his liability to carry out all his
obligations under the contract of transportation, the consignor shall
have the right to dispose of the goods by withdrawing them at the
airport of departure or destination, or by stopping them in the course of
the journey on any landing, or by calling for them to be delivered at the
place of destination, or in the course of the journey to a person other
than the consignee named in the air waybill, or by requiring them to be
returned to the airport of departure. He must not exercise this right of
disposition in such a way as to prejudice the carrier or other consignors,
and he must repay any expenses occasioned by the exercise of this
right.
(2) If it is impossible to carry out the orders of the consignor the

carrier must so inform him forthwith.
(3) If the carrier obeys the orders of the consignor for the disposition
of the goods without requiring the production of the part of the air
waybill delivered to the latter, he will be liable, without prejudice to his
right of recovery from the consignor, for any damage which may be
caused thereby to any person who is lawfully in possession of that part
of the air waybill.
(4) The right conferred on the consignor shall cease at the moment
when that of the consignee begins in accordance with Article 13,
below. Nevertheless, if the consignee declines to accept the waybill or
the goods, or if he cannot be communicated with, the consignor shall
resume his right of disposition.
ARTICLE 13. (1) Except in the circumstances set out in the

preceding article, the consignee shall be entitled, on arrival of the
goods at the place of destination, to require the carrier to hand over to
him the air waybill and to deliver the goods to him, on payment of the
charges due and on complying with the conditions of transportation set
out in the air waybill.
(2) Unless it is otherwise agreed, it shall be the duty of the carrier to

give notice to the consignee as soon as the goods arrive.
(3) If the carrier admits the loss of the goods, or if the goods have
not arrived at the expiration of seven days after the date on which they
ought to have arrived, the consignee shall be entitled to put into force
against the carrier the rights which flow from the contract of
transportation.
ARTICLE 14. The consignor and the consignee can respectively

enforce all the rights given them by Articles 12 and 13, each in his own
name, whether he is acting in his own interest or in the interest of
another, provided that he carries out the obligations imposed by the
contract.
ARTICLE 15. (1) Articles 12, 13, and 14 shall not affect either the
relations of the consignor and the consignee with each other or the
relations of third parties whose rights are derived either from the
consignor or from the consignee.
(2) The provisions of Article 12, 13, and 14 can only be varied by
express provision in the air waybill.
ARTICLE 16. (1) The consignor must furnish such information

and attach to the air waybill such documents as are necessary to meet
the formalities of customs, octroi, or police before the goods can be
delivered to the consignee. The consignor shall be liable to the carrier
for any damage occasioned by the absence, insufficiency, or
irregularity of any such information or documents, unless the damage is
due to the fault of the carrier or his agents.
(2) The carrier is under no obligation to enquire into the correctness

or sufficiency of such information or documents.
CHAPTER III
Liability of the Carrier
ARTICLE 17. The carrier shall be liable for damage sustained in

the event of the death or wounding of a passenger or any other bodily
injury suffered by a passenger, if the accident which caused the damage
so sustained took place on board the aircraft or in the course of any of
the operations of embarking or disembarking.
ARTICLE 18. (1) The carrier shall be liable for damage sustained
in the event of the destruction or loss of, or of damage to, any checked
baggage or any goods, if the occurrence which caused the damage so
sustained took place during the transportation by air.
(2) The transportation by air within the meaning of the preceding

paragraph shall comprise the period during which the baggage or goods
are in charge of the carrier, whether in an airport or on board an
aircraft, or, in the case of a landing outside an airport, in any place
whatsoever.
(3) The period of the transportation by air shall not extend to any
transportation by land, by sea, or by river performed outside an airport.
If, however, such transportation takes place in the performance of a
contract for transportation by air, for the purpose of loading, delivery or
transshipment, any damage is presumed, subject to proof to the
contrary, to have been the result of an event which took place during
the transportation by air.
ARTICLE 19. The carrier shall be liable for damage occasioned by

delay in the transportation by air of passengers, baggage, or goods.
ARTICLE 20. (1) The carrier shall not be liable if he proves that
he and his agents have taken all necessary measures to avoid the
damage or that it was impossible for him or them to take such
measures.
(2) In the transportation of goods and baggage the carrier shall not
be liable if he proves that the damage was occasioned by an error in
piloting, in the handling of the aircraft, or in navigation and that, in all
other respects, he and his agents have taken all necessary measures to
avoid the damage.
ARTICLE 21. If the carrier proves that the damage was caused by
or contributed to by the negligence of the injured person the court may,
in accordance with the provisions of its own law, exonerate the carrier
wholly or partly from his liability.
ARTICLE 22. (1) In the transportation of passengers, the liability

of the carrier for each passenger shall be limited to the sum of 125,000
francs. Where, in accordance with the law of the court to which the
case is submitted, damages may be awarded in the form of periodical
payments, the equivalent capital value of the said payments shall not
exceed 125,000 francs. Nevertheless, by special contract, the carrier
and the passenger may agree to a higher limit of liability.
(2) In the transportation of checked baggage and of goods, the

liability of the carrier shall be limited to a sum of 250 francs per
kilogram, unless the consignor has made, at the time when the package
was handed over to the carrier, a special declaration of the value at
delivery and has paid a supplementary sum if the case so requires. In
that case the carrier will be liable to pay a sum not exceeding the
declared sum, unless he proves that the sum is greater than the actual
value to the consignor at delivery.
(3) As regards objects of which the passenger takes charge himself
the liability of the carrier shall be limited to 5,000 francs per passenger.
(4) The sums mentioned above shall be deemed to refer to the

French franc consisting of 65½ milligrams of gold at the standard of
fineness of nine hundred thousandths. These sums may be converted
into any national currency in round figures.
ARTICLE 23. Any provision tending to relieve the carrier of

liability or to fix a lower limit than that which is laid down in this
convention shall be null and avoid, but the nullity of any such provision
shall not involve the nullity of the whole contract, which shall remain
subject to the provisions of this convention.
ARTICLE 24. (1) In the cases covered by Articles 18 and 19 any

action for damages, however founded, can only be brought subject to
the conditions and limits set out in this convention.
(2) In the cases covered by Article 17 the provisions of the

preceding paragraph shall also apply, without prejudice to the questions
as to who the persons are who have the right to bring suit and what are
their respective rights.
ARTICLE 25. (1) The carrier shall not be entitled to avail himself
of the provisions of this convention which exclude or limit his liability,
if the damage is caused by his wilful misconduct or by such default on
his part as, in accordance with the law of the court to which the case is
submitted, is considered to be equivalent to wilful misconduct.
(2) Similarly, the carrier shall not be entitled to avail himself of the
said provisions, if the damage is caused under the same circumstances
by any agent of the carrier acting within the scope of his employment.
ARTICLE 26. (1) Receipt by the person entitled to the delivery of

baggage or goods without complaint shall be prima facie evidence that
the same have been delivered in good condition and in accordance with
the document of transportation.
(2) In case of damage, the person entitled to delivery must complain

to the carrier forthwith after the discovery of the damage, and, at the
latest, within 3 days from the date of receipt in the case of baggage and
7 days from the date of receipt in the case of goods. In case of delay the
complaint must be made at the latest within 14 days from the date on
which the baggage or goods have been placed at his disposal.
(3) Every complaint must be made in writing-upon the document of
transportation or by separate notice in writing dispatched within the
times aforesaid.
(4) Failing complaint within the times aforesaid, no action shall lie
against the carrier, save in the case of fraud on his part.
ARTICLE 27. In the case of the death of the person liable, an

action for damages lies in accordance with the terms of this convention
against those legally representing his estate.
ARTICLE 28. (1) An action for damages must be brought, at the

option of the plaintiff, in the territory of one of the High Contracting
Parties, either before the court of the domicile of the carrier or of his
principal place of business or where he has a place of business through
which the contract has been made or before the court at the place of
destination.
(2) Questions of procedure shall be governed by the law of the court

to which the case is submitted.
ARTICLE 29. (1) The right to damages shall be extinguished if an

action is not brought within 2 years, reckoned from the date of arrival
at the destination, or from the date on which the aircraft ought to have
arrived, or from the date on which the transportation stopped.
(2) The method of calculating the period of limitation shall be

determined by the law of the court to which the case is submitted.
ARTICLE 30. (1) In the case of transportation to be performed by

various successive carriers and falling within the definition set out in
the third paragraph of Article 1, each carrier who accepts passengers,
baggage or goods shall be subject to the rules set out in this convention,
and shall be deemed to be one of the contracting parties to the contract
of transportation insofar as the contract deals with that part of the
transportation which is performed under his supervision.
(2) In the case of transportation of this nature, the passenger or his

representative can take action only against the carrier who performed
the transportation during which the accident or the delay occurred, save
in the case where, by express agreement, the first carrier has assumed
liability for the whole journey.
(3) As regards baggage or goods, the passenger or consignor shall

have a right of action against the first carrier, and the passenger or
consignee who is entitled to delivery shall have a right of action against
the last carrier, and further, each may take action against the carrier
who performed the transportation during which the destruction, loss,
damage, or delay took place. These carriers shall be jointly and
severally liable to the passenger or to the consignor or consignee.
CHAPTER IV
Provisions Relating to Combined Transportation
ARTICLE 31. (1) In the case of combined transportation

performed partly by air and partly by any other mode of transportation,
the provisions of this convention shall apply only to the transportation,
by air, provided that the transportation by air falls within the terms of
Article 1.
(2) Nothing in this convention shall prevent the parties in the case of
combined transportation from inserting in the document of air
transportation conditions relating to other modes of transportation,
provided that the provisions of this convention are observed as regards
the transportation by air.
CHAPTER V
General and Final Provisions
ARTICLE 32. Any clause contained in the contract and all special
agreements entered into before the damage occurred by which the
parties purport to infringe the rules laid down by this convention,
whether by deciding the law to be applied, or by altering the rules as to
jurisdiction, shall be null and void. Nevertheless, for the transportation
of goods arbitration clauses shall be allowed, subject to this
convention, if the arbitration is to take place within one of the
jurisdictions referred to in the first paragraph of article 28.
ARTICLE 33. Nothing contained in this convention shall prevent

the carrier either from refusing to enter into any contract of
transportation or from making regulations which do not conflict with
the provisions of this convention.
ARTICLE 34. This convention shall not apply to international

transportation by air performed by way of experimental trial by air
navigation enterprises with the view to the establishment of regular
lines of air navigation, nor shall it apply to transportation performed in
extraordinary circumstances outside the normal scope of an air carrier's
business.
ARTICLE 35. The expression "days" when used in this convention

means current days, not working days.
ARTICLE 36. This convention is drawn up in French in a single
copy which shall remain deposited in the archives of the Ministry for
Foreign Affairs of Poland and of which one duly certified copy shall be
sent by the Polish Government to the Government of each of the High
Contracting Parties.
ARTICLE 37. (1) This convention shall be ratified. The

instruments of ratification shall be deposited in the archives of the
Ministry for Foreign Affairs of Poland, which shall give notice of the
deposit to the Government of each of the High Contracting Parties.
(2) As soon as this convention shall have been ratified by five of the
High Contracting Parties it shall come into force as between them on
the ninetieth day after the deposit of the fifth ratification. Thereafter it
shall come into force between the High Contracting Parties which shall
have ratified and the High Contracting Party which deposits its
instrument of ratification on the ninetieth day after the deposit.
(3) It shall be the duty of the Government of the Republic of Poland

to notify the Government of each of the High Contracting Parties of the
date on which this convention comes into force as well as the date of
the deposit of each ratification.
ARTICLE 38. (1) This convention shall, after it has come into
force, remain open for adherence by any state.
(2) The adherence shall be effected by a notification addressed to the

Government of the Republic of Poland, which shall inform the
Government of each of the High Contracting Parties thereof.
(3) The adherence shall take effect as from the ninetieth day after the
notification made to the Government of the Republic of Poland.
ARTICLE 39. (1) Any one of the High Contracting Parties may
denounce this convention by a notification addressed to the
Government of the Republic of Poland, which shall at once inform the
Government of each of the High Contracting Parties.
(2) Denunciation shall take effect six months after the notification of
denunciation and shall operate only as regards the party which shall
have proceeded to denunciation.
ARTICLE 40. (1) Any High Contracting Party may, at the time of
signature or of deposit of ratification or of adherence, declare that the
acceptance which it gives to this convention does not apply to all or
any of its colonies, protectorates, territories under mandate, or any
other territory subject to its sovereignty or its authority, or any other
territory under its suzerainty.
(2) Accordingly, any High Contracting Party may subsequently

adhere separately in the name of all or any of its colonies, protectorates,
territories under mandate, or any other territory subject to its
sovereignty or to its authority or any other territory under its suzerainty
which have been thus excluded by its original declaration.
(3) Any High Contracting Party may denounce this Convention, in

accordance with its provisions, separately or for all or any of its
colonies, protectorates, territories under mandate, or any other territory
subject to its sovereignty or to its authority, or any other territory under
its suzerainty.
ARTICLE 41. Any High Contracting Party shall be entitled not

earlier than two years after the coming into force of this convention to
call for the assembling of a new international conference in order to
consider any improvements which may be made in this convention. To
this end it will communicate with the Government of the French
Republic which will take the necessary measures to make preparations
for such conference.
WARSAW CONVENTION RELATED PHILIPPINE CASES
[G.R. No. 151783. July 8, 2003.]

VICTORINO SAVELLANO, VIRGINIA B. SAVELLANO and
DEOGRACIAS B. SAVELLANO, petitioners, vs. NORTHWEST
AIRLINES, respondent.
Petitioners were passengers of respondent airline and their contract of

carriage with the latter was for the San Francisco-Tokyo(Narita)-
Manila flights. Petitioners claimed, however, that this itinerary was not
followed when the aircraft used for the first segment of the journey
developed engine trouble. Petitioners likewise claimed that the contents
of their baggage which was not allowed to be placed inside the
passengers' baggage compartment were stolen. Consequently,
petitioners filed a case for damages which was decided by the trial
court in their favor. On appeal, the Court of Appeals reversed the
decision of the trial court. Hence, this petition.
The Supreme Court ruled that the change of petitioners' flight itinerary
does not fall under the situation covered by the phrase "may alter or
omit stopping places shown in the ticket in case of necessity." A case
of necessity must first be proven. The burden of proving it necessarily
fell on respondent. This responsibility it failed to discharge.
Respondent failed to show a case of necessity for changing the
stopping place from Tokyo to Los Angeles and Seoul. Thus,
respondent committed a breach of the contract of carriage. However,
the Court ruled that moral damages cannot be awarded in the case at
bar because of the absence of bad faith, ill will, malice or wanton
conduct on the part of respondent. Neither are exemplary damages
proper in the present case because respondent has not been proven to
have acted in a wanton, fraudulent, reckless, oppressive or malevolent
manner. Nevertheless, the Court awarded nominal damages to
petitioners. Nominal damages are recoverable if no actual, substantial
or specific damages were shown to have resulted from the breach, as in
the case at bar. The Court also held that the claim for the alleged lost
items from the baggage of petitioners cannot prosper because they
failed to give timely notice of the loss to respondent.
A claim for the alleged lost items from the baggage of petitioners
cannot prosper because they failed to give timely notice of the loss to
respondent. The Conditions printed on the airline ticket plainly read:
"2. Carriage hereunder is subject to the rules and limitations relating to
liability established by the Warsaw Convention unless such carriage is
not 'International carriage' as defined by that Convention... "7. Checked
baggage will be delivered to bearer of the baggage check. In case of
damage to baggage moving in international transportation complaint
must be made in writing to carrier forthwith after discovery of damage,
and at the latest, within 7 days from receipt; in case of delay, complaint
must be made within 21 days from date the baggage was delivered..."
The pertinent provisions of the Rules Relating to International Carriage
by Air (Warsaw Convention) state: "Article 26 (1) Receipt by the
person entitled to delivery of luggage or goods without complaint is
prima facie evidence that the same have been delivered in good
condition and in accordance with the document of carriage. (2) In case
of damage, the person entitled to delivery must complain to the carrier
forthwith after the discovery of the damage, and, at the latest, within
three days from the date of receipt in the case of luggage and seven
days from date of receipt in the case of goods. In the case of delay the
complaint must be made at the latest within fourteen days from the date
on which the luggage or goods have been placed at his disposal. (3)
Every complaint must be made in writing upon the document of
carriage or by separate notice in writing dispatched within the times
aforesaid. (4) Failing complaint within the times aforesaid, no action
shall lie against the carrier, save in the case of fraud on his part."
[G.R. No. 119641. May 17, 1996.]

PHILIPPINE AIRLINES, INC., petitioner, vs. COURT OF
APPEALS, DR. JOSEFINO MIRANDA and LUISA MIRANDA,
respondents.
Although the Warsaw Convention has the force and effect of law in
this country, being a treaty commitment assumed by the Philippine
government, said convention does not operate as an exclusive
enumeration of the instances for declaring a carrier liable for breach of
contract of carriage or as an absolute limit of the extent of that liability.
The Warsaw Convention declares the carrier liable in the enumerated
cases and under certain limitations. However, it must not be construed
to preclude the operation of the Civil Code and pertinent laws. It does
not regulate, much less exempt, the carrier from liability for damages
for violating the rights of its passengers under the contract of carriage,
especially if willful misconduct on the part of the carrier's employees is
found or established. (Cathay Pacific Airways, Ltd. vs. Court of
Appeals, et al., G.R. No. 60501, March 5, 1993)
[G.R. No. 171092. March 15, 2010.]

EDNA DIAGO LHUILLIER, petitioner, vs. BRITISH AIRWAYS,
respondent.
Petitioner contends that in Santos III v. Northwest Orient Airlines, the

cause of action was based on a breach of contract while her cause of
action arose from the tortious conduct of the airline personnel and
violation of the Civil Code provisions on Human Relations. In addition,
she claims that our pronouncement in Santos III v. Northwest Orient
Airlines that "the allegation of willful misconduct resulting in a tort is
insufficient to exclude the case from the comprehension of the Warsaw
Convention," is more of an obiter dictum rather than the ratio
decidendi. She maintains that the fact that said acts occurred aboard a
plane is merely incidental, if not irrelevant.
We disagree with the position taken by the petitioner. Black defines

obiter dictum as "an opinion entirely unnecessary for the decision of
the case" and thus "are not binding as precedent." In Santos III v.
Northwest Orient Airlines, Augusto Santos III categorically put in issue
the applicability of Article 28 (1) of the Warsaw Convention if the
action is based on tort.
In the said case, we held that the allegation of willful misconduct
resulting in a tort is insufficient to exclude the case from the realm of
the Warsaw Convention. In fact, our ruling that a cause of action based
on tort did not bring the case outside the sphere of the Warsaw
Convention was our ratio decidendi in disposing of the specific issue
presented by Augusto Santos III. Clearly, the contention of the herein
petitioner that the said ruling is an obiter dictum is without basis.
Relevant to this particular issue is the case of Carey v. United Airlines,

where the passenger filed an action against the airline arising from an
incident involving the former and the airline's flight attendant during an
international flight resulting to a heated exchange which included
insults and profanity. The United States Court of Appeals (9th Circuit)
held that the "passenger's action against the airline carrier arising from
alleged confrontational incident between passenger and flight attendant
on international flight was governed exclusively by the Warsaw
Convention, even though the incident allegedly involved intentional
misconduct by the flight attendant."
In Bloom v. Alaska Airlines, the passenger brought nine causes of

action against the airline in the state court, arising from a confrontation
with the flight attendant during an international flight to Mexico. The
United States Court of Appeals (9th Circuit) held that the "Warsaw
Convention governs actions arising from international air travel and
provides the exclusive remedy for conduct which falls within its
provisions." It further held that the said Convention "created no
exception for an injury suffered as a result of intentional conduct”
which in that case involved a claim for intentional infliction of
emotional distress.
It is thus settled that allegations of tortious conduct committed

against an airline passenger during the course of the international
carriage do not bring the case outside the ambit of the Warsaw
Convention.
xxx
Under Article 28 (1) of the Warsaw Convention, the plaintiff may bring
the action for damages before —
1. the court where the carrier is domiciled;
2. the court where the carrier has its principal place of business;
3. the court where the carrier has an establishment by which the contract
has been made; or
4. the court of the place of destination.
In this case, it is not disputed that respondent is a British corporation
domiciled in London, United Kingdom with London as its principal
place of business. Hence, under the first and second jurisdictional rules,
the petitioner may bring her case before the courts of London in the
United Kingdom. In the passenger ticket and baggage check presented
by both the petitioner and respondent, it appears that the ticket was
issued in Rome, Italy. Consequently, under the third jurisdictional rule,
the petitioner has the option to bring her case before the courts of Rome
in Italy. Finally, both the petitioner and respondent aver that the place
of destination is Rome, Italy, which is properly designated given the
routing presented in the said passenger ticket and baggage check.
Accordingly, petitioner may bring her action before the courts of
Rome, Italy. We thus find that the RTC of Makati correctly ruled that it
does not have jurisdiction over the case filed by the petitioner.
[G.R. No. 152122. July 30, 2003.]

CHINA AIRLINES, petitioner, vs. DANIEL CHIOK, respondent.
In denying the petition, the Supreme Court ruled that petitioner cannot
evade liability to respondent. even though it may have been only a
ticket issuer for the Hong Kong-Manila sector. Although the contract of
air transportation was between petitioner and respondent, with the
former endorsing to PAL the Hongkong-to-Manila segment of the
journey, such contract of carriage has always been treated in this
jurisdiction as a single operation. According to the Court, for reasons of
public interest and policy, the ticket-issuing airline acts as principal in a
contract of carriage and is thus liable for the acts and the omissions of
any errant carrier to which it may have endorsed any sector of the
entire, continuous trip. The Court likewise affirmed the award of moral
and exemplary damages. Both the trial and appellate courts found that
the respondent had satisfactorily proven the existence of the factual
basis for the damages adjudged against petitioner CAL and PA.
[G.R. No. 122308. July 8, 1997.]

PURITA S. MAPA, CARMINA S. MAPA and CORNELIO P.
MAPA, petitioners, vs. COURT OF APPEALS AND TRANS-
WORLD AIRLINES INC., respondents.
Petitioners filed with the trial court a complaint for damages. The trial
court dismissed the case for lack of jurisdiction in light of Article 28(1)
of the Warsaw Convention. The trial court held that the Warsaw
Convention is applicable in case at bar, since the Philippines and the
United States are parties to the convention, the contracts of
transportation come within the meaning of "International
Transportation." The trial court also held that the Philippines, not being
one of the places specified in Art. 28 (1) of the Warsaw Convention
where the complaint may be instituted then it has no jurisdiction over
the present case. On appeal to the Court of Appeals, the appellate court
affirmed the ruling of the trial court. Hence, the present petition. The
Supreme Court ruled that the contracts does not fall under the category
of international transportation as provided by the Warsaw Convention.
The only way to bring the contracts between petitioners Purita and
Carmina Mapa on the one hand, and TWA on the other, within the
category of international transportation is to link them or to make them
an integral part of the Manila — Los Angeles travel of Purita and
Carmina through Pal aircraft. However, the alleged international tickets
issued by TWA were not presented in evidence, clearly then; there is at
all no factual basis of the finding that the TWA tickets were issued in
conjunction with the international tickets.
THIRD DIVISION
[G.R. No. 149547. July 4, 2008.]
PHILIPPINE AIRLINES, INC., petitioner, vs. HON. ADRIANO
SAVILLO, Presiding Judge of RTC Branch 30, Iloilo City, and
SIMPLICIO GRIÑO, respondents.
In determining whether PAL's Motion to Dismiss should have been

granted by the trial court, it must be ascertained if all the claims made
by the private respondent in his Complaint are covered by the Warsaw
Convention, which effectively bars all claims made outside the two-
year prescription period provided under Article 29 thereof. If the
Warsaw Convention covers all of private respondent's claims, then
Civil Case No. 23773 has already prescribed and should therefore be
dismissed. On the other hand, if some, if not all, of respondent's claims
are outside the coverage of the Warsaw Convention, the RTC may still
proceed to hear the case.
The Warsaw Convention applies to "all international transportation of

persons, baggage or goods performed by any aircraft for hire." It seeks
to accommodate or balance the interests of passengers seeking recovery
for personal injuries and the interests of air carriers seeking to limit
potential liability. It employs a scheme of strict liability favoring
passengers and imposing damage caps to benefit air carriers. The
cardinal purpose of the Warsaw Convention is to provide uniformity of
rules governing claims arising from international air travel; thus, it
precludes a passenger from maintaining an action for personal injury
damages under local law when his or her claim does not satisfy the
conditions of liability under the Convention.
Article 19 of the Warsaw Convention provides for liability on the part

of a carrier for "damages occasioned by delay in the transportation by
air of passengers, baggage or goods." Article 24 excludes other
remedies by further providing that "(1) in the cases covered by articles
18 and 19, any action for damages, however founded, can only be
brought subject to the conditions and limits set out in this convention."
Therefore, a claim covered by the Warsaw Convention can no longer
be recovered under local law if the statute of limitations of two years
has already lapsed.
Nevertheless, this Court notes that jurisprudence in the Philippines and

the United States also recognizes that the Warsaw Convention does not
"exclusively regulate" the relationship between passenger and carrier
on an international flight. This Court finds that the present case is
substantially similar to cases in which the damages sought were
considered to be outside the coverage of the Warsaw Convention.
In United Airlines v. Uy, this Court distinguished between the (1)

damage to the passenger's baggage and (2) humiliation he suffered at
the hands of the airline's employees. The first cause of action was
covered by the Warsaw Convention which prescribes in two years,
while the second was covered by the provisions of the Civil Code on
torts, which prescribes in four years.
Similar distinctions were made in American jurisprudence. In Mahaney

v. Air France, a passenger was denied access to an airline flight
between New York and Mexico, despite the fact that she held a
confirmed reservation. The court therein ruled that if the plaintiff were
to claim damages based solely on the delay she experienced — for
instance, the costs of renting a van, which she had to arrange on her
own as a consequence of the delay — the complaint would be barred
by the two-year statute of limitations. However, where the plaintiff
alleged that the airlines subjected her to unjust discrimination or undue
or unreasonable preference or disadvantage, an act punishable under
the United States laws, then the plaintiff may claim purely nominal
compensatory damages for humiliation and hurt feelings, which are not
provided for by the Warsaw Convention. In another case, Wolgel v.
Mexicana Airlines, the court pronounced that actions for damages for
the "bumping off" itself, rather than the incidental damages due to the
delay, fall outside the Warsaw Convention and do not prescribe in two
years.
NOTES
The diligence requirement imposed on common carriers is a constant

question in every bar exam.
In the case of Nedlloyd B.V.Rotterdam vs. Glowlaks Enterprises, Ltd.,

(GR no.156330, November 19, 2014), the Supreme Court again
repeated that, “Common carriers are responsible for the loss,
destruction or deterioration of goods unless the same is due to flood,
storm, earthquake or other natural disaster or calamity. Extraordinary
diligence is that extreme care and caution which persons of unusual
prudence and circumspection use for securing or preserving their own
property or rights.”
Thus, the High Court reiterated in the same case that, “When the goods
shipped are either lost or arrived in damaged condition, a presumption
arises against the carrier of its failure to observe that diligence, and
there not be an express finding of negligence to hold it liable. To
overcome the presumption of negligence, the common carrier must
establish by adequate proof that it exercised extraordinary diligence
over the goods. It must do more than merely show that some other
party could be responsible for the damage.”
What are the remedies of a consignee if the goods he was expecting

to be delivered are rendered useless?
This was one of the issues that the Supreme Court had to address in the
case of Loadstar Shipping Company vs. Malayan Insurance Inc., (GR
no.185565, November 26, 2014). In this case, the High Court stated
that, “If goods are rendered useless for sale, consumption, or for the
intended purpose, the consignee may reject the goods and demand
payment of such goods at their market price on that day pursuant to
Article 365 of the Code of Commerce of the Philippines. In case the
damaged portion of the goods can be segregated from those delivered
in good condition, the consignee may reject those in damaged
condition and accept merely those which are in good condition. But if
the consignee is able to prove that it is impossible to use those goods
which were delivered in good condition without the others, then the
entire shipment may be rejected.”
What is a slot charter agreement?
It is a contract of affreightment, whereby the use of the shipping space

on vessels is leased in part or as a whole, to carry goods for others. It
may be for a determinate period of time (time charter) or for a single or
consecutive voyage (voyage charter). The charterer is free from
liability to third persons in respect of the ship.
What is a bareboat or demise charter agreement?
In a charter by demise or bareboat, the whole vessel is let to the

charterer with a transfer to him of its entire command and possession
and consequent control over its navigation, including the master and its
crew. The charterer therefore becomes the owner for the voyage or
service stipulated and hence liable for damages or loss sustained by the
goods transported.
What is the degree of diligence requirement for an arrastre operator?
In Asian Terminals Inc, vs. First Lepanto Taisho Insurance Corp. (GR
no.185964, June 16, 2014), the Supreme Court emphasized that, “The
relationship between the consignee and arrastre operator is akin to that
existing between the consignee and/or the owner of the shipped goods
and the common carrier, or that between a depositor and a
warehouseman. Hence, in the performance of its obligations, an arrastre
operator should observe the same degree of diligence as that required
of a common carrier and a warehouseman. Being the custodian of
goods discharged from a vessel, an arrastre operator’s duty is to take
care of the goods and to turn them over to the party entitled to their
possession.”
If a contract of carriage and bill of lading is silent on the

computation of damages, what contract will govern the parties?
Where a contract of carriage as well as of bill of lading is silent as

regards the computation of damages, the relevant provisions of the
Civil Code of the Philippines and the Code of Commerce shall govern
the contract between the parties.
What is the “Limited Liability Rule?”

Also called the “no vessel, no liability doctrine,” it provides that
liability of ship owner is limited to ship owner’s interest over the
vessel. Consequently, in case of loss, the ship owner’s liability is also
extinguished. Limited liability likewise extends to ship’s
appurtenances, equipment, freightage, and insurance proceeds. The
ship owner’s or agent’s liability is merely co-extensive with his interest
in the vessel, such that a total loss of the vessel results in the liability’s
extinction. The vessel’s total destruction extinguishes maritime liens
because there is no longer any res to which they can attach. (Monarch
Insurance v. CA, G.R. No. 92735, June 8, 2000)
Are there any exceptions to the “Limited Liability Rule’?
1. Repairs and provisioning of the vessel before the loss of the vessel;
(Art. 586)
2. Insurance proceeds. If the vessel is insured, the proceeds will go to
the persons entitled to claim from the shipowner; (Vasquez v. CA, G.R.
No. L-42926, Sept. 13, 1985)
3. Workmen’s Compensation cases (now Employees’ Compensation
under the Labor Code); (Oching v. San Diego, G.R. No. 775, Dec. 17,
1946)
4. When the shipowner is guilty of fault or negligence; Note: But if the
captain is the one who is guilty, doctrine may still be invoked, hence,
abandonment is still an option.
5. Private carrier; or
6.Voyage is not maritime in character.
FINANCIAL REHABILITION AND INSOLVENCY LAW
The FRIA integrates rehabilitation and restructuring along with

insolvency law. Furthermore, it moves from the debtor-controlled
process of the older system to a framework where the creditors take the
fore in determining the future of the distressed corporation.
“Section 4. Definition of Terms. – As used in this Act, the term:
xxx
“(p) Insolvent shall refer to the financial condition of a debtor that is

generally unable to pay its or his liabilities as they fall due in the
ordinary course of business or has liabilities that are greater than its
or his assets.”
Three modes of rehabilitation
1. Court Supervised
a. Voluntary (section 12)
b. Involuntary (section 13)
2. Pre-Negotiated (sec. 76)
3. Out of Court or Informal (sec. 83)
FIRST METHOD: COURT SUPERVISED
• In court supervised rehabilitation proceedings, the rehabilitation

of the debtor officially commences after the court makes the finding
that the Petition (whether voluntary or involuntary) is sufficient in form
or substance. More specifically, the rehabilitation proceedings are
deemed to commence on the date of the issuance of the
Commencement Order, pursuant to Sections 15 and 16 of the law
COMMENCEMENT ORDER
• “Section 15. Action on the Petition. – If the Court finds the

petition for rehabilitation to be sufficient in form and substance, it
shall, within five (5) working days from the filing of the petition, issue
a Commencement Order. If within the same period, the court finds the
petition deficient in form and substance, the court may, in its
discretion, give the petitioner/s a reasonable time within which to
amend or supplement the petition, or to submit such documents as may
be necessary or proper to put the petition in proper order. In such
case, the five (5) working days provided above for the issuance of the
Commencement Order shall be reckoned from the date of the filing of
the amended or supplemental petition or the submission of such
documents.
• Under Section 16, the “Commencement Order” shall, among

others: (i) declare that the debtor is under rehabilitation, (ii) direct
publication of the Order and notice to creditors, (iii) appoint a
rehabilitation receiver, (iv) set the date of the initial hearing for the
determination of whether or not the debtor can be rehabilitated, (v)
direct all creditors to file their claims at least five (5) days from initial
hearing and (vi) direct the government, through the Bureau of Internal
Revenue (BIR) to either file its Comment to the Petition for
Rehabilitation or present its claims against the debtor.
SUSPENSION OR STAY ORDER
• In addition, the Commencement Order shall include a

Suspension or Stay Order prohibiting the sale or disposition of
assets of the debtor and ordering the suspension of all actions
against the debtor and/or the debtor’s estate. The scope and/or
coverage of the stay order under the FRIA remain as broad as
before. However, certain cases are allowed to proceed until the
execution stage
• Section 18. Exceptions to the Stay or Suspension Order. – The

Stay or Suspension Order shall not apply:
“(a) to cases already pending appeal in the Supreme Court as of

commencement date: Provided, that any final and executory judgment
arising from such appeal shall be referred to the court for appropriate
action;
“(b) subject to the discretion of the court, to cases pending or filed at a

specialized court or quasi-judicial agency which, upon determination
by the court, is capable of resolving the claim more quickly, fairly and
efficiently than the court: Provided, that any final and executory
judgment of such court or agency shall be referred to the court and
shall be treated as a non-disputed claim
“(c) to the enforcement of claims against sureties and other persons

solidarily liable with the debtor, and third party or accommodation
mortgagors as well as issuers of letters of credit, unless the property
subject of the third party or accommodation mortgage is necessary for
the rehabilitation of the debtor as determined by the court upon
recommendation by the rehabilitation receiver;
“(d) to any form of action of customers or clients of a securities market

participant to recover or otherwise claim moneys or securities entrusted
to the latter in the ordinary course of the latter’s business as well as any
action of such securities market participant or the appropriate
regulatory agency or self-regulating organization to pay of settle such
claims or liabilities;
“(f) the clearing and settlement of financial transactions through the
facilities of a clearing agency or similar entities duly authorized,
registered and/or recognized by the appropriate regulatory agency like
the Bangko Sentral ng Pilipinas (BSP) and the SEC as well as any form
of actions of such agencies or entities to reimburse themselves for any
transactions settled for the debtor; and
“(g) Any criminal action against the individual debtor or owner,

partner, director or officer of a debtor shall not be affected by any
proceeding commenced under this Act.”
• Note that pursuant to sub-paragraph (c) above, the suspension

order does not cover the enforcement of claims against “persons
solidarily liable with the debtor” including “issuers of letters of credit.”
This follows the rule in MWSS vs. Daway [GR No. 160732, 21 June
2004] which held that a letter of credit is excluded from the
jurisdiction of the rehabilitation court.
• On the other hand, the Stay or Suspension Order applies with

equal force to the enforcement of both secured and unsecured claims
except that under Section 60 of the FRIA, the issuance of the Stay or
Suspension Order “shall not be deemed in any way to diminish or
impair the security or lien of a secured creditor, or the value of his
lien or security, except that his right to enforce said security or lien
may be suspended during the term of the Stay Order.” Again, this
paraphrases the “equality in equity” principle the effects of which were
explained in the case of Tsuneishi Heavy Industries (Cebu), Inc. v.
Negros Navigation Co., Inc. et. al. [GR 166845, 10 December 2008],
• Continuous Supply of Goods and Services
To ensure continuous delivery of goods and services necessary for the

debtor’s business, the FRIA adopts the provision under the 2008 Rules
granting the rehabilitation court authority to include in the
Commencement Order a prohibition enjoining the debtor’s suppliers
from withholding supply of essential goods and services
Waiver of Taxes
• Section 19 of the law provides that from the time of the issuance
of the Commencement Order until the approval of the Rehabilitation
Plan or dismissal of the petition, the imposition of all taxes shall be
waived, thus:
• “Section 19. Waiver of Taxes and Fees Due to the National

Government and to Local Government Units. – Upon issuance of the
Commencement Order by the court, and until the approval of the
Rehabilitation Plan or dismissal of the Petition, which is earlier, the
imposition of all taxes and fees, including penalties interests and
charges thereof, due to the national government or to LGUs shall be
considered waived, in furtherance of the objectives of rehabilitation.”
• Section 57 of the law grants the debtor the power to confirm or

cancel pre-existing contracts within ninety (90) days from the issuance
of the Commencement Order in order to weed out extremely onerous
contracts that may have been the cause of the debtor’s predicament.
Validity of Contracts
• “Section 57. Treatment of Contracts. – Unless cancelled by

virtue of a final judgment of a court of competent jurisdiction issued
prior to the issuance of the Commencement Order, or at anytime
thereafter by the court before which the rehabilitation proceedings are
pending, all valid and subsisting contracts of the debtor with creditors
and other third parties as at the commencement date shall continue in
force: Provided, That within ninety (90) days following the
commencement of proceedings, the debtor, with the consent of the
rehabilitation receiver, shall notify each contractual counterparty of
whether it is confirming the particular contract. Contractual
obligations arising or performed during this period, and afterwards for
confirmed contracts, shall be considered administrative expenses.
Contracts not confirmed within the required deadline shall be
considered terminated. Claims for actual damages, if any, arising as a
result of the election to terminate a contract shall be considered a pre-
commencement claim against the debtor. Nothing contained herein
shall prevent the cancellation or termination of any contract of the
debtor for any ground provided by law.
• The initial appointment of the Rehabilitation Receiver (as one of

the elements of the Commencement Order under Section 16) is subject
to the discretion of the court, which may retain the original appointee
or choose another from the petitioners’ nominees. However, this
discretion is limited in the following circumstances:
• (a) In case the debtor is a securities market participant, in which

case the court shall give priority to the nominee of the appropriate
securities or investor protection fund; or
• (b) If the qualified natural or juridical person is nominated by

more than 50% of secured creditors and general unsecured creditors, in
which case the court “shall appoint the creditors’ nominee.”
• The Rehabilitation Receiver will not supplant the existing
management of the debtor corporation unless otherwise ordered by the
court on motion of any interested party, thus:
“Section 36. Displacement of Existing Management by the

Rehabilitation Receiver or Management Committee. - - Upon motion of
any interested party, the court may appoint and direct the
rehabilitation receiver to assume the powers of management of the
debtor, or appoint a management committee that will undertake the
management of the debtor, upon clear and convincing evidence of any
of the following circumstances:
a) Actual or imminent danger of dissipation, loss, wastage or

destruction of the debtor’s assets or other properties;
(b) Paralyzation of the business operations of the debtor; or
(c) Gross mismanagement of the debtor, or fraud or other wrongful

conduct on the part of, or gross or willful violation of this Act by,
existing management of the debtor or the owner, partner, director,
officer or representative/s in management of the debtor.
“In case the court appoints the rehabilitation receiver to assume the
powers of management of the debtor, the court may:
“(1) require the rehabilitation receiver to post an additional bond;
“(2) authorize him to engage the services or employ persons or entities

to assist him in the discharge of his managerial functions; and
“(3) authorize a commensurate increase in his compensation.”
• As part of its functions, the Rehabilitation Receiver retains the

authority to file an action to annul certain pre-commencement
transactions intended to defraud the creditors. Indeed, this power can be
traced back to the basic authority of the receiver to undertake measures
to preserve property under receivership under the Rules of Court23.
• Should the receiver refuse to institute proceedings, any creditor

may take up the cudgels of the corporation with leave of court. If
successful, Section 59 of the law provides that the fruits of the case will
redound to the pro-active creditor to the extent of the value of its credit
plus costs,
Administration Proceedings
• Within forty (40) days from the issuance of the Commencement

Order, the court shall set the case for Initial Hearing to determine
whether or not there is substantial likelihood that the debtor can be
rehabilitated
• Within forty (40) days from the Initial Hearing, the

Rehabilitation Receiver is required to submit his written Report to the
court, which will include a determination of (a) whether or not there is
substantial likelihood for the debtor to be successfully rehabilitated or
in the alternative (b) whether the debtor should be dissolved or
liquidated. After submission of report, the Court shall act on the
petition by: (i) giving due course to the petition, (ii) dismissing the
petition or (iii) converting the proceedings into one for liquidation.
• In the event the court gives due course to the petition, the court
will require the Rehabilitation Receiver to review the Rehabilitation
Plan, taking into consideration the views of the debtor and all creditor
classes. While the consultation is a necessary procedure, the Receiver
is not bound by the objections of the parties.
• Section 62 of the FRIA provides that Rehabilitation Plan must

include provisions establishing classes and subclasses of voting
creditors. After identifying the appropriate creditor classes and sub-
classes, the Plan must “specify the treatment of each class or subclass”
and “provide for equal treatment for all claims within the same class.”
• Similar to the 2008 Rules, Section 62 grants additional

protection to secured creditors by requiring the Plan to “maintain the
security interest of secured creditors and preserve the liquidation value
of the security.”
• Once satisfied with the version of the Rehabilitation Plan, the

receiver must convene the creditors and present the plan to them for
approval. Unlike the old procedure however, the vote of the debtor is
not required for the approval of the plan.
• “Section 64. Creditor Approval of the Rehabilitation Plan. – The

rehabilitation receiver shall notify the creditors and stakeholders that
the Plan is ready for their examination. Within twenty (20) days from
the said notification, the rehabilitation receiver shall convene the
creditors, either as a whole or per class, for purposes of voting on the
approval of the Plan. The Plan shall be deemed rejected unless
approved by all classes of creditors whose rights are adversely
modified or affected by the Plan. For purposes of this section, the Plan
is deemed to have been approved by a class of creditors if members of
the said class holding more than fifty per cent (50%) of the total claims
of the said class vote in favor of the Plan. The votes of the creditors
shall be based solely on the amount of their respective claims based on
the registry of claims submitted by the rehabilitation receiver pursuant
to Section 44 hereof.
• Rehabilitation Court can confirm even if creditors object
Notwithstanding the rejection of the Rehabilitation Plan, the court may

confirm the Rehabilitation Plan if all of the following circumstances
are present:
“(a) the Rehabilitation Plan complies with all the requirements

specified in this Act;
“(b) the rehabilitation receiver recommends the confirmation of the

Rehabilitation Plan;
“(c) The shareholders, owners or partners of the juridical debtor lose at

least their controlling interest as a result of the Rehabilitation Plan; and
“(d) The Rehabilitation Plan would likely provide the objecting class of
creditors with compensation which has a net present value greater than
that which they would have received if the debtor were under
liquidation.”
Cram Down Provision
Even if the Rehabilitation Plan is not approved by the creditors, the

court may still confirm the Plan if it can be shown that objecting class
of creditors shall receive a “net present value greater than that they
would have received if the debtor were under liquidation.” Under
the Interim Rules, the debtor can force court approval of a
Rehabilitation Plan over the objection of creditors by merely showing
that “[t]he plans would likely provide the objecting class of creditors
with compensation greater than that which they would have received if
the assets of the debtor were sold by a liquidator within a three-month
period.” The 2008 Rules 33 changed the basis to “present value
projected in the plan”. Requiring that the computation be based on
“net present value” is intended to prevent debtors from railroading
a rehabilitation plan disadvantageous to the creditors by the simple
expedient of stretching
• In corporate rehabilitation proceedings, whose rights shall

prevail over the other?
• This was the issue that the Supreme Court had to confront with
in the case of Aquino vs. Pacific Plans, Inc., (GR no.193108, December
10, 2014) involving the plan holders and other creditors of pre-need
company Pacific Plans. The Supreme Court ruled that: “While the
voice and participation of the creditors is crucial in the determination
of the viability of the rehabilitation plan, as they stand to benefit or
suffer in the implementation thereof, the interests of all stakeholders is
the ultimate and prime consideration.”
• In relation to corporate rehabilitation proceedings, the Supreme

Court in the case of Philippine Bank of Communications vs. Basic
Polyprinters and Packaging Corporation (GR no.187581, October
2014) ruled as well that the purpose of such proceedings is two-fold –
(1.) To efficiently and equitably distribute the assets of the
insolvent debtor to its creditors; and (2.) To provide the debtor
with a fresh start.
• The “material financial commitment” rule was also discussed in

the same aforementioned case. This rule becomes significant in
determining the earnestness and good faith of the financially distressed
corporation in financing its proposed rehabilitation plan. This material
financial commitment may include the readiness, willingness and
ability of the corporation to contribute funds or property to guarantee
the operation of the corporation during the period of rehabilitation.
One Year Rule
• To prevent the debtor (or any interested party) from dragging out
the proceedings in the hopes of obtaining a settlement on the basis of
attrition, the law fixes a maximum period of one year (from the time of
the filing of the petition) within which the plan must be confirmed.
Otherwise, the proceedings will turn into one of liquidation. This
should force the parties to negotiate in earnest.
• SECOND METHOD: PRE-NEGOTIATED

REHABILITATION
• Debtor by himself or jointly with Creditors
File a petition for the approval of a pre-negotiated rehabilitation plan

provided that it has been endorsed by creditors holding at least 2/3 of
the total liabilities of the debtor, including secured creditors holding
more than 50 percent of the total secured claims and unsecured
creditors holding more than 50 percent of the total unsecured claims
• The FRIA gives the parties the freedom to undertake the
proceedings without a receiver.
• The Order under Section 77 of the law which directs interested

parties to file their objections to the Pre-Negotiated Rehabilitation Plan
also requires publication and personal delivery of a copy of the Petition
to each creditor who is not a petitioner but who holds at least 10%37 of
the total liabilities of the debtor.
Grounds to object Pre-Negotiated Rehabilitation
“Section 79. Objection to the Petition or Rehabilitation Plan. – Any

creditor or other interested party may submit to the court a verified
objection to the petition or the Rehabilitation Plan not later than eight
(8) days from the date of the second publication of the Order
mentioned in Section 77 hereof. The objection shall be limited to the
following:
“(a) The allegations in the petition or the Rehabilitation Plan, or the

attachments thereto are materially false or misleading;
“(b) The majority of any class of the creditors do not in fact support
the Rehabilitation Plan;
“(c) The Rehabilitation Plan fails to accurately account for a claim

against the debtor and the claim is not categorically declared as a
contested claim; or
“(d) The support of the creditors, or any of them, was induced by

fraud.
• If, after due hearing, the courts find merit to the objection, it will
order the debtor to cure the defect.
• On the other hand, if it finds that the petitioners acted in bad

faith or that the defect is incurable, it may order the conversion of
proceedings into one for liquidation38. As in the 2008 Rules, the
Rehabilitation Plan will be deemed approved if the court fails to act
within a period of 120 days.
THIRD METHOD OF REHABILITATION: OUT OF COURT

SETTLEMENT
• Pursuant to Section 89 of the Act, “[t]he insolvent debtor and
creditor may seek court assistance for the execution or implementation”
of the Rehabilitation Plan, provided that it meets the minimum
requirements of the law.
• To allow the parties to negotiate a feasible workout plan, the

debtor and creditors holding more than 50% of the debt may agree on a
standstill period pending the completion of the plan for up to 120 days,
provided in addition that notice to all creditors is published in a
newspaper of general circulation once a week for two consecutive
weeks. The said notice must invite the creditors to participate in the
negotiation of the plan and inform them that the plan will be binding on
all creditors if the required votes are obtained.
Cram down effect
• An out-of-court Rehabilitation Plan approved by at least 67% of

secured creditors, 75% of unsecured creditors, and 85% of all
creditors42 will be “crammed down” all creditors pursuant to Section
86 of the law.
• Section 86. Cram Down Effect. – A restructuring/workout

agreement or Rehabilitation Plan that is approved pursuant to an
informal workout framework referred to in this chapter shall have the
same legal effect as confirmation of a Plan under Section 69 hereof.
The notice of the Rehabilitation Plan or restructuring agreement or
Plan shall be published once a week for at least three (3) consecutive
weeks in a newspaper of general circulation in the Philippines. The
Rehabilitation Plan or restructuring agreement shall take effect upon
the lapse of fifteen (15) days from the date of the last publication of the
notice thereof.”
Cross Border Insolvency
• By virtue of Section 139 of the FRIA, the Philippines is now

deemed to adopt the provisions of the UNCITRAL Model Law on Cross
Border Insolvency (1997) subject to procedural rules to be
promulgated by the Supreme Court. Essentially, the law provides a
framework for the recognition of foreign insolvency proceedings and
grants certain parties in such proceedings access to Philippine courts
for purposes of obtaining some form of affirmative or other relief.
DATA PRIVACY LAW (RA 10173)
RA 10173, or the Data Privacy Act, protects individuals from

unauthorized processing of personal information that is (1) private, not
publicly available; and (2) identifiable, where the identity of the
individual is apparent either through direct attribution or when put
together with other available information.
1. Personal vs. Sensitive Personal Information

Under Sec. 3(g) of the Data Privacy Act, “[p]ersonal information refers
to any information whether recorded in a material form or not, from
which the identity of an individual is apparent or can be reasonably and
directly ascertained by the entity holding the information, or when put
together with other information would directly and certainly identify an
individual.”
In other words, personal information is any information which can be
linked to your identity, thus making you readily identifiable.
Under Sec. 3(k) of the Data Privacy Act, “[p]rivileged information

refers to any and all forms of data which under the Rules of Court and
other pertinent laws constitute privileged communication.” One such
example would be any information given by a client to his lawyer.
Such information would fall under attorney-client privilege and would,
therefore, be considered privileged information.
2. Scope
Data Privacy Act applies to any natural or juridical persons involved in

the processing of personal information. It also covers those who,
although not found or established in the Philippines, use equipment
located in the Philippines, or those who maintain an office, branch, or
agency in the Philippines.
3. Processing of personal information
Under Sec. 3(j) of the Data Privacy Act, “[p]rocessing refers to any
operation or any set of operations performed upon personal information
including, but not limited to, the collection, recording, organization,
storage, updating or modification, retrieval, consultation, use,
consolidation, blocking, erasure or destruction of data.”
In other words, processing of personal information is any operation

where personal information is involved. Whenever your information is,
among other things, collected, modified, or used for some purpose,
processing already takes place.
The law treats both kinds of personal information differently. Personal

information may be processed, provided that the requirements of the
Data Privacy Act are complied with. On the other hand, the processing
of sensitive personal information is, in general, prohibited. The Data
Privacy Act provides the specific cases where processing of sensitive
personal information is allowed.
While personal information refers to information that makes you

readily identifiable, sensitive personal information, as defined in Sec.
3(l) of the Data Privacy Act, refers to personal information:
1. About an individual’s race, ethnic origin, marital status, age,
color, and religious, philosophical or political affiliations;
2. About an individual’s health, education, genetic or sexual life
of a person, or to any proceeding for any offense committed
or alleged to have been committed by such person, the
disposal of such proceedings, or the sentence of any court in
such proceedings;
3. Issued by government agencies peculiar to an individual
which includes, but not limited to, social security numbers,
previous or cm-rent health records, licenses or its denials,
suspension or revocation, and tax returns; and
Specifically established by an executive order or an act of Congress to

be kept classified.
Therefore, any information that can be categorized under any of the

enumerated items are considered sensitive personal information.
Section 13 of the Data Privacy Act enumerates the cases where

sensitive personal information and privileged information may be
processed. These are the following:
(a.) The data subject has given his or her consent,

specific to the purpose prior to the processing, or in
the case of privileged information, all parties to the
exchange have given their consent prior to
processing;
(b.) The processing of the same is provided for by

existing laws and regulations: Provided, That such
regulatory enactments guarantee the protection of
the sensitive personal information and the privileged
information: Provided, further, That the consent of
the data subjects are not required by law or
regulation permitting the processing of the sensitive
personal information or the privileged information;
(c.) The processing is necessary to protect the life and

health of the data subject or another person, and the
data subject is not legally or physically able to
express his or her consent prior to the processing;
1. The processing is necessary to achieve the lawful

and noncommercial objectives of public
organizations and their associations: Provided,
That such processing is only confined and
related to the bona fide members of these
organizations or their associations: Provided,
further, That the sensitive personal information
are not transferred to third parties: Provided,
finally, That consent of the data subject was
obtained prior to processing;
2. The processing is necessary for purposes of

medical treatment, is carried out by a medical
practitioner or a medical treatment institution,
and an adequate level of protection of personal
information is ensured; or
3. The processing concerns such personal

information as is necessary for the protection of
lawful rights and interests of natural or legal
persons in court proceedings, or the
establishment, exercise or defense of legal
claims, or when provided to government or
public authority.
4. Exceptions
The Data Privacy Act explicitly states that its provisions are not
applicable in the following cases:
(a.) Information about any individual who is or was an officer

or employee of a government institution that relates to the
position or functions of the individual, including:
(b.) The fact that the individual is or was an officer or
employee of the government institution;
(c.) The title, business address and office telephone number of
the individual;
(d.) The classification, salary range and responsibilities of the
position held by the individual; and
(e.) The name of the individual on a document prepared by the
individual in the course of employment with the
government;
(f.) Information about an individual who is or was performing
service under contract for a government institution that
relates to the services performed, including the terms of
the contract, and the name of the individual given in the
course of the performance of those services;
(g.) Information relating to any discretionary benefit of a
financial nature such as the granting of a license or permit
given by the government to an individual, including the
name of the individual and the exact nature of the benefit;
(h.) Personal information processed for journalistic, artistic,
literary or research purposes;
(i.) Information necessary in order to carry out the functions of
public authority which includes the processing of personal
data for the performance by the independent, central
monetary authority and law enforcement and regulatory
agencies of their constitutionally and statutorily mandated
functions. Nothing in this Act shall be construed as to have
amended or repealed Republic Act No. 1405, otherwise
known as the Secrecy of Bank Deposits Act; Republic Act
No. 6426, otherwise known as the Foreign Currency
Deposit Act; and Republic Act No. 9510, otherwise known
as the Credit Information System Act (CISA);
(j.) Information necessary for banks and other financial

institutions under the jurisdiction of the independent,
central monetary authority or Bangko Sentral ng Pilipinas
to comply with Republic Act No. 9510, and Republic Act
No. 9160, as amended, otherwise known as the Anti-
Money Laundering Act and other applicable laws; and
(k.) Personal information originally collected from residents of
foreign jurisdictions in accordance with the laws of those
foreign jurisdictions, including any applicable data privacy
laws, which is being processed in the Philippines.
5. Rights of data subject
The Data Privacy Act of 2012 was passed to extend protection to

people and their data in this modern age. It provides a regime for
regulating the processing and storage of particularly personal and
sensitive information, given the new avenues of information exchange
that have opened up and continue to open up in this era. This regulation
is achieved through the recognition of rights accorded to data subjects
and through the imposition of obligations upon entities that deal with
the information of such data subjects. In order to understand how the
Data Privacy Act provides protection—and more importantly, in order
for any individual to be able to benefit from its protections—it is
important to understand the concept of a data subject, as well as his
rights.
Under the law, a data subject is defined as “an individual whose

personal information is processed”(section 3, [c.])
Corollarily, personal information is defined as “any information

whether recorded in a material form or not, from which the identity of
an individual is apparent or can be reasonably and directly ascertained
by the entity holding the information, or when put together with other
information would directly and certainly identify an individual.”
(Section 3 [h.])
In addition to this, the law also defines sensitive personal

information (section 3 [l.]), such as one’s ethnic origin or education,
and privileged personal information.
Lastly, processing refers to “any operation or any set of operations

performed upon personal information including, but not limited to, the
collection, recording, organization, storage, updating or modification,
retrieval, consultation, use, consolidation, blocking, erasure or
destruction of data.” (section 3 [j.])
These definitions show that the coverage of the law is comprehensive

and broad, as it protects any individual or entity whose identity-related
information is collected, recorded, or used. At a time when social
media continues to flourish and expand their presence in the daily lives
of people and businesses, it is not unlikely that information relating to
their identities is disclosed. This puts a lot of information and
individuals at risk of illegitimate divulgence. Hence, the Data Privacy
Act accords data subjects several rights enforceable against offending
entities. These rights are guided by the principles of transparency,
legitimate purpose, and proportionality.
Under Chapter IV of the Act, there are eight (8) rights that belong to
data subjects, namely: the right to be informed; the right to access; the
right to object; the right to erasure and blocking; the right to rectify; the
right to file a complaint; the right to damages; and the right to data
portability.
First, the right to be informed means that the data subject has the
right to know when his or her personal data shall be, are being, or have
been processed. Collection and processing of data without the data
subject’s knowledge and explicit consent is made unlawful, and entities
in possession of personal data is obligated to inform the data subject of
any breaches or compromises in their data.
Second, the right to access involves being able to compel any entity
possessing any personal data to provide the data subject with a
description of such data in its possession, as well as the purposes for
which they are to be or are being processed. Furthermore, other details
regarding the processing of their information may be obtained, such as
the period for which the information will be stored, and the recipients
to whom the information may be disclosed. This must be complied
with in an easy-to-access format, accompanied by a description in plain
language.
Thirdly, the right to object requires that the consent of the data subject
be secured in the collecting and processing of his or her data. It grants
the data subject the choice of refusing to consent, as well as the choice
to withdraw consent, as regards collection and processing. As earlier
stated, any activity involving a data subject’s personal data without his
or her consent is deemed illegal.
The right to erasure or blocking allows the data subject to suspend,
withdraw or order the blocking, removal, destruction of his or her
personal information from the personal information controller’s filing
system upon discovery and substantial proof that the personal
information are incomplete, outdated, false, unlawfully obtained, used
for unauthorized purposes or are no longer necessary for the purposes
for which they were collected. This is akin to the recognized right to be
forgotten.
Corollarily, the right to rectify, allows the data subject to dispute any

inaccuracy or error in the personal information processed, and to have
the personal information controller correct it immediately. In line with
this, the personal information controller must ensure that the new and
the retracted information will be accessible, and that third parties who
received the erroneous data will be informed, upon the request of the
data subject.
In line with the control given to the data subject, the right to data
portability enables the data subject to obtain and electronically move,
copy, or transfer personal data for further use. This also carries out
another policy behind the law–ensuring the free flow of personal
information.
The last two rights are related to the enforcement of the above-
discussed rights. First, the right to file a complaint with the National
Privacy Commission affords a remedy to any data subject who “[feels]
that [his or her] personal information has been misused, maliciously
disclosed, or improperly disposed,” or in case of any violation of his or
her data privacy rights. Secondly, the right to damages entitles the
aggrieved data subject to be indemnified for any damages sustained
due to inaccurate, incomplete, outdated, false, unlawfully obtained or
unauthorized use of his or her personal information.
As can be gleaned from these rights, the Data Privacy Act of 2012 is
comprehensive in its protection to the data subject. This is even
strengthened by the fact that these rights can also be invoked by the
data subject’s lawful heirs and assigns in the event of his or her
incapacity and even after his or her death.
RELEVANT JURISPRUDENCE ON DATA PRIVACY
1. HONDA AVE S. VIVARES and SPS. MARGARITA and DAVID

SUZARA, Petitioners, VS.ST. THERESA’S COLLEGE, MYLENE
RHEZA T. ESCUDERO, and JOHN DOES, Respondents, G.R.
No. 202666, September 29, 2014
FACTS:
Julia and Julienne, both minors, were graduating high school students
at St. Theresa’s College (STC), Cebu City. Sometime in January 2012,
while changing into their swimsuits for a beach party they were about
to attend, Julia and Julienne, along with several others, took digital
pictures of themselves clad only in their undergarments. These pictures
were then uploaded by Angela on her Facebook profile.
At STC, Mylene Escudero, a computer teacher at STC’s high school

department, learned from her students that some seniors at STC posted
pictures online, depicting themselves from the waist up, dressed only in
brassieres. Escudero then asked her students if they knew who the girls
in the photos are. In turn, they readily identified Julia and Julienne,
among others.
Using STC’s computers, Escudero’s students logged in to their
respective personal Facebook accounts and showed her photos of the
identified students, which include: (a) Julia and Julienne drinking hard
liquor and smoking cigarettes inside a bar; and (b) Julia and Julienne
along the streets of Cebu wearing articles of clothing that show
virtually the entirety of their black brassieres.
Also, Escudero’s students claimed that there were times when access to
or the availability of the identified students’ photos was not confined to
the girls’ Facebook friends, but were, in fact, viewable by any
Facebook user.
Investigation ensued. Then Julia, Julienne and other students involved

were barred from joining the commencement exercises.
Petitioners, who are the respective parents of the minors, filed a

Petition for the Issuance of a Writ of Habeas Data. RTC dismissed the
petition for habeas data on the following grounds:
1. Petitioners failed to prove the existence of an actual or

threatened violation of the minors’ right to privacy, one of the
preconditions for the issuance of the writ of habeas data.
2. The photos, having been uploaded on Facebook without
restrictions as to who may view them, lost their privacy in some
ways
3. STC gathered the photographs through legal means and for a
legal purpose, that is, the implementation of the school’s policies
and rules on discipline.
ISSUE:
Whether or not there was indeed an actual or threatened violation of the

right to privacy in the life, liberty, or security of the minors involved in
this case. (Is there a right to informational privacy in online social
network activities of its users?)
HELD:
Nature of Writ of Habeas Data
It is a remedy available to any person whose right to privacy in life,

liberty or security is violated or threatened by an unlawful act or
omission of a public official or employee, or of a private individual or
entity engaged in the gathering, collecting or storing of data or
information regarding the person, family, home and correspondence of
the aggrieved party.
It is an independent and summary remedy designed to protect the

image, privacy, honor, information, and freedom of information of an
individual, and to provide a forum to enforce one’s right to the truth
and to informational privacy. It seeks to protect a person’s right to
control information regarding oneself, particularly in instances in
which such information is being collected through unlawful means in
order to achieve unlawful ends.
In developing the writ of habeas data, the Court aimed to protect an

individual’s right to informational privacy, among others. A
comparative law scholar has, in fact, defined habeas data as “a
procedure designed to safeguard individual freedom from abuse in
the information age.”
Issuance of writ of habeas data; requirements
1. The existence of a person’s right to informational privacy

2. An actual or threatened violation of the right to privacy in
life, liberty or security of the victim (proven by at least
substantial evidence)
Note that the writ will not issue on the basis merely of an alleged
unauthorized access to information about a person.
The writ of habeas data is not only confined to cases of extralegal

killings and enforced disappearances
The writ of habeas data can be availed of as an independent remedy to

enforce one’s right to privacy, more specifically the right to
informational privacy. The remedies against the violation of such right
can include the updating, rectification, suppression or destruction of the
database or information or files in possession or in control of
respondents. Clearly then, the privilege of the Writ of Habeas Data may
also be availed of in cases outside of extralegal killings and enforced
disappearances.
Meaning of “engaged” in the gathering, collecting or storing of

data or information
Habeas data is a protection against unlawful acts or omissions of public

officials and of private individuals or entities engaged in gathering,
collecting, or storing data about the aggrieved party and his or her
correspondences, or about his or her family. Such individual or entity
need not be in the business of collecting or storing data.
To “engage” in something is different from undertaking a business

endeavour. To “engage” means “to do or take part in something.” It
does not necessarily mean that the activity must be done in pursuit of
a business. What matters is that the person or entity must be gathering,
collecting or storing said data or information about the aggrieved party
or his or her family. Whether such undertaking carries the element of
regularity, as when one pursues a business, and is in the nature of a
personal endeavour, for any other reason or even for no reason at all, is
immaterial and such will not prevent the writ from getting to said
person or entity.
As such, the writ of habeas data may be issued against a school

like STC.
Right to informational privacy
Right to informational privacy is the right of individuals to control

information about themselves. Several commentators regarding
privacy and social networking sites, however, all agree that given the
millions of OSN users, “in this Social Networking environment,
privacy is no longer grounded in reasonable expectations, but rather in
some theoretical protocol better known as wishful thinking.” So the
underlying question now is: Up to what extent is the right to privacy
protected in OSNs?
Facebook Privacy Tools
To address concerns about privacy, but without defeating its purpose,

Facebook was armed with different privacy tools designed to regulate
the accessibility of a user’s profile as well as information uploaded by
the user. In H v. W, the South Gauteng High Court recognized this
ability of the users to “customize their privacy settings,” but did so with
this caveat: “Facebook states in its policies that, although it makes
every effort to protect a user’s information, these privacy settings are
not foolproof.”
For instance, a Facebook user can regulate the visibility and

accessibility of digital images (photos), posted on his or her
personal bulletin or “wall,” except for the user’s profile picture and ID,
by selecting his or her desired privacy setting:
1. Public – the default setting; every Facebook user can view the
photo;
2. Friends of Friends – only the user’s Facebook friends and their
friends can view the photo;
3. Friends – only the user’s Facebook friends can view the photo;
4. Custom – the photo is made visible only to particular friends
and/or networks of the Facebook user; and
5. Only Me – the digital image can be viewed only by the user.
The foregoing are privacy tools, available to Facebook users, designed

to set up barriers to broaden or limit the visibility of his or her specific
profile content, statuses, and photos, among others, from another user’s
point of view. In other words, Facebook extends its users an avenue
to make the availability of their Facebook activities reflect their
choice as to “when and to what extent to disclose facts about
themselves – and to put others in the position of receiving such
confidences.”
LONE ISSUE:
The Supreme Court held that STC did not violate petitioners’
daughters’ right to privacy as the subject digital photos were viewable
either by the minors’ Facebook friends, or by the public at large.
Without any evidence to corroborate the minors’ statement that the

images were visible only to the five of them, and without their
challenging Escudero’s claim that the other students were able to view
the photos, their statements are, at best, self-serving, thus deserving
scant consideration.
It is well to note that not one of petitioners disputed Escudero’s sworn

account that her students, who are the minors’ Facebook “friends,”
showed her the photos using their own Facebook accounts. This only
goes to show that no special means to be able to view the allegedly
private posts were ever resorted to by Escudero’s students, and that it is
reasonable to assume, therefore, that the photos were, in reality,
viewable either by (1) their Facebook friends, or (2) by the public at
large.
Considering that the default setting for Facebook posts is “Public,” it

can be surmised that the photographs in question were viewable to
everyone on Facebook, absent any proof that petitioners’ children
positively limited the disclosure of the photograph. If such were the
case, they cannot invoke the protection attached to the right to
informational privacy.
US v. Gines-Perez: A person who places a photograph on the Internet

precisely intends to forsake and renounce all privacy rights to such
imagery, particularly under circumstances such as here, where the
Defendant did not employ protective measures or devices that would
have controlled access to the Web page or the photograph itself.
United States v. Maxwell: The more open the method of transmission

is, the less privacy one can reasonably expect. Messages sent to the
public at large in the chat room or e-mail that is forwarded from
correspondent to correspondent loses any semblance of privacy.
The Honorable Supreme Court continued and held that setting a post’s
or profile detail’s privacy to “Friends” is no assurance that it can no
longer be viewed by another user who is not Facebook friends with the
source of the content. The user’s own Facebook friend can share said
content or tag his or her own Facebook friend thereto, regardless of
whether the user tagged by the latter is Facebook friends or not with the
former. Also, when the post is shared or when a person is tagged, the
respective Facebook friends of the person who shared the post or who
was tagged can view the post, the privacy setting of which was set at
“Friends.” Thus, it is suggested, that a profile, or even a post, with
visibility set at “Friends Only” cannot easily, more so automatically,
be said to be “very private,” contrary to petitioners’ argument.
No privacy invasion by STC; fault lies with the friends of minors
Respondent STC can hardly be taken to task for the perceived privacy
invasion since it was the minors’ Facebook friends who showed the
pictures to Tigol. Respondents were mere recipients of what were
posted. They did not resort to any unlawful means of gathering the
information as it was voluntarily given to them by persons who had
legitimate access to the said posts. Clearly, the fault, if any, lies with
the friends of the minors. Curiously enough, however, neither the
minors nor their parents imputed any violation of privacy against the
students who showed the images to Escudero.
Different scenario of setting is set on “Me Only” or “Custom”
Had it been proved that the access to the pictures posted were limited to
the original uploader, through the “Me Only” privacy setting, or that
the user’s contact list has been screened to limit access to a select few,
through the “Custom” setting, the result may have been different, for in
such instances, the intention to limit access to the particular post,
instead of being broadcasted to the public at large or all the user’s
friends en masse, becomes more manifest and palpable.
E-COMMERCE (RA 8792)
1. Legal recognition of electronic data messages, documents and

signatures
Section 5 defines the following:
c) "Electronic Data Message" refers to information generated, sent,

received or stored by electronic, optical or similar means.
(d) "Information and Communications System" refers to a system

intended for and capable of generating, sending, receiving, storing, or
otherwise processing electronic data messages or electronic documents
and includes the computer system or other similar device by or in
which data is recorded or stored and any procedures related to the
recording or storage of electronic data message or electronic document.
(e) "Electronic Signature" refers to any distinctive mark, characteristic

and/or sound in electronic form, representing the identity of a person
and attached to or logically associated with the electronic data message
or electronic document or any methodology or procedures employed or
adopted by a person and executed or adopted by such person with the
intention of authenticating or approving an electronic data message or
electronic document.
(a) Electronic Document" refers to information or the representation of
information, data, figures, symbols or other modes of written
expression, described or however represented, by which a right is
established or an obligation extinguished, or by which a fact may be
prove and affirmed, which is receive, recorded, transmitted, stored,
processed, retrieved or produced electronically.
Section 7. Legal Recognition of Electronic Documents - Electronic

documents shall have the legal effect, validity or enforceability as any
other document or legal writing, and -
(a) Where the law requires a document to be in writing, that requirement is

met by an electronic document if the said electronic document
maintains its integrity and reliability and can be authenticated so as to
be usable for subsequent reference, in that -
(b.) The electronic document has remained complete and unaltered, apart
from the addition of any endorsement and any authorized change, or
any change which arises in the normal course of communication,
storage and display; and
The electronic document is reliable in the light of the purpose for

which it was generated and in the light of all relevant circumstances.
(c.) Paragraph (a) applies whether the requirement therein is in the form of
an obligation or whether the law simply provides consequences for the
document not being presented or retained in its original from.
Where the law requires that a document be presented or retained in its

original form, that requirement is met by an electronic document if -
i. There exists a reliable assurance as to the integrity of the document

from the time when it was first generated in its final form; and
ii. That document is capable of being displayed to the person to whom

it is to be presented: Provided, That no provision of this Act shall apply
to vary any and all requirements of existing laws on formalities
required in the execution of documents for their validity.
For evidentiary purposes, an electronic document shall be the

functional equivalent of a written document under existing laws.
2. Presumption relating to electronic signatures

Section 9. Presumption Relating to Electronic Signatures - In any
proceedings involving an electronic signature, it shall be presumed that
-
(a) The electronic signature is the signature of the person to whom it

correlates; and
(b) The electronic signature was affixed by that person with the
intention of signing or approving the electronic document unless the
person relying on the electronically signed electronic document knows
or has noticed of defects in or unreliability of the signature or reliance
on the electronic signature is not reasonable unde
r the circumstances.
3. Admissibility and evidential weight of electronic data message or

electronic document
Section 12. Admissibility and Evidential Weight of Electronic Data

Message or Electronic Document. - In any legal proceedings, nothing
in the application of the rules on evidence shall deny the admissibility
of an electronic data message or electronic document in evidence -
(a) On the sole ground that it is in electronic form; or
(b) On the ground that it is not in the standard written form, and the
electronic data message or electronic document meeting, and
complying with the requirements under Sections 6 or 7 hereof shall be
the best evidence of the agreement and transaction contained therein.
In assessing the evidential weight of an electronic data message or

electronic document, the reliability of the manner in which it was
generated, stored or communicated, the reliability of the manner in
which its originator was identified, and other relevant factors shall be
given due regard.

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NOTES ON MERCANTILE LAW REVIEW 2019

1. Letters of Credit (Code of Commerce Arts 567-572)

DEFINITION OF COMMERCIAL LAW

The sources of commercial law are:

1. Principal – Statute Law, Agreements, Customs and Court decisions.

TIPS IN RESOLVING COMMERCIAL LAW QUESTION:

1. Is there is a commercial transaction

1987 CONSTITUTIONAL PROVISIONS RELEVANT TO PHILIPPINE COMMERCIAL LAW

The following are the constitutional provisions relevant to Commercial Law:

DECLARATION OF STATE PRINCIPLES (Art. II)

ARTICLE XII (National Economy and Patrimony)

LETTERS OF CREDIT (Code of Commerce)

Two Essential Conditions for a Letter of Credit

Parties to a Letter of Credit

Kinds of Letters of Credit

Important Doctrines in Letters of Credit

ON LETTER OF CREDIT “INDEPENDENCE PRINCIPLE”

Effect of Fraudulent Misrepresentation in applying and securing an L/C:

G.R. No. 187979. April 25, 2012.]

[G.R. No. 160732. June 21, 2004.]

Remedy for fraudulent abuse

Remedy of issuing bank after payment of the beneficiary

TRUST RECEIPTS LAW (PD 115)

Parties to a Trust Receipt

INSURANCE LAW (PD 612 as amended by RA 10607)

Nature and Definition of Insurance Contract

 Rationale for the Rule:

Other Nature of Contract of Insurance

 Consensual – Perfected by the meeting of the minds of the parties

Concealment and Representation

 Exceptions to the Exception:

 Types of Losses Compensable:

Requisites for rescission in case of alteration

Section 174 defines casualty insurance by process of elimination.

 Applies to almost any kind of insurance

1. Accident or Health Insurance

Examples - personal accident, robbery/theft insurance

Insurable Interest in Casualty Insurance

Subject to two tests:

Compulsory Motor Vehicle Liability Insurance

 Sections 373 – 389, Insurance Code of the Philippines

Kinds of Life Insurance Policies

1. Ordinary Life Policy

2. Limited Payment Life Policy

 Payable only upon death of the insured

3. Term Payment Life Policy

Life Insurance Life Annuity

 Section 180 (2nd paragraph)

PERILS OF THE SEA vs. PERILS OF THE SHIP

1. Natural and inevitable action of the sea;

Concealment in Marine Insurance

DISTINCTION ON CONCEALMENT IN MARINE INSURANCE

IN CASE OF CONSTRUCTIVE TOTAL LOSS, INSURED’s

REVISED SECURITIES ACT (RA 8799)

3. Provides requirements to ensure that transactions involving

SEC Powers and Functions (Section 5)